In their first article for CMC Markets, Kurt Hulse and Tom Pizzuti of Trading on the Mark highlight recent developments in US treasuries. Their work draws on Elliott Wave theory, a form of technical analysis that looks at long-term price patterns and investor psychology to forecast market trends and give traders useful insights.
An Elliott Wave approach treats patterns in price action as fractal structures that obey certain rules and have additional tendencies. The "order of magnitude" of each structure is indicated by the punctuation and capitalization of the wave labels.
It can be useful to examine charts on a higher time frame first, before moving to the lower time frames where our trades actually happen. Ideally that allows us to take advantage of the fractal nature of markets by looking for confirmation that the smaller structures are behaving as expected in the context of the larger structure of which they are a part.
A favourite target for Elliott Wave traders is a series of five overlapping waves that moves price into a new zone. These motive structures can often be found nested one inside another, consistent with their fractal nature. As you examine the charts below, going down to lower time frames, you can see a declining five-wave (i)-(ii)-(iii)-(iv)-(v) structure beginning at the March 2020 high. It contains smaller sequences labelled as i-ii-iii-iv-v, [I]-[II]-[III]-[IV]-[V], and so on*.
US 30-year bond futures - weekly chart
The keys to trading with this approach are to get in the market near the start of a motive structure of whatever time frame or magnitude you like to work with, and then to get out near the end. It sounds so simple when we put it that way!
Bond traders who caught some of the rapid decline in recent months should congratulate themselves for riding a motive structure down into the current price area. Also, they should note that the charts now show complete, or nearly complete, five-wave structures on multiple time frames. On the weekly chart we see a potential wave 'v' reaching down into the supports we've been watching at 124^27 and 122^22.
Counter-trend traders working mainly with a weekly chart might start using this area to fish for a good long entry near a low. Those working on faster time frames should use the weekly chart merely as context and should watch signals and price behaviour on faster charts. We note that there is not yet any divergence in the momentum indicator with weekly candles.
Taking the analysis down one time frame, we see another potential five-wave move coming off the wave 'iv' high in early August. The assignment of wave labels is always difficult during a trending move, but this is our primary count.
US 30-year bond futures - daily chart
The momentum indicator (a cycle-adaptive commodity channel index) shows some nice positive divergence on the daily chart, suggesting that a pause or reversal may be due soon. Also, the market appears to be noticing support near the area of the October 2018 low.
Traders working on a daily time frame might interpret these developments as signs that the downward move is losing steam. Ideally they would look to an even faster chart for confirmation of momentum signals and a downward five-wave structure from small wave [IV].
Based on the moves visible on a daily chart, we calculate supports at 122^24, 121^04, and 119^14.
US 30-year bond futures - 240 min chart
Moving down to a four-hour chart that includes the overnight session, bonds could be considered technically to have completed five waves down from the 4 October high. With the requirements for structure met, we turn to watching actual price action.
Note that price was unable to climb and close above prior support at 125^26 and instead fell away from that area. We interpret that to mean there is still enough bearish mojo in the market to allow a test of lower supports. Also we don't see a clean divergence signal in the momentum indicator on the four-hour chart.
Depending on the time frame you're trading, some of the above charts will be more useful to you than others. For daily and intraday traders, the trend in bonds is still down even though there are signs it may be reaching an end. A long trade now would be very aggressive for fast traders, as we don't yet have strong and consistent signals that the market has found the expected low.
*Elliott Wave enthusiasts will chime in that waves one and four typically do not overlap in a motive pattern, and waves (i) and (iv) on the weekly chart here show overlap. There's an exception for a pattern called a leading diagonal, but the weekly chart for bonds shows yet another exception to the rule. We'll cover that in more detail in a future piece.
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