No. of Recommendations: 4
DXKSX is a 2x inverse of the 10-year Treasury note. It’s a bet that interest-rates will go up. I knew I was late to the trade. But I decided it still had room to run. So I put on a position last week at 5.77. Prices jumped the next day to 5.83, and I was whooping and yelling that I had nailed the move exactly right. I had gotten in, and the market had confirmed that the trade was correct. Then, of course, prices rolled back over again, and I did what I should have done from the getgo. I pulled a longer-term chart and checked out the price action more carefully.

Definitely late to the trade, right? But if the underlying fundamentals really are as bad for the US economy as it is being widely denied, then the Bernank won’t be able to prevent rates from going up, no matter how much buying he does. So the trade should be done. But I also hate it when prices move against me, and I’d be willing to bail and try again later if I really were too early. But take a look at DXKSX using a 6-month Renko chart. It’s obvious that DXKSX put in a bottom by doing a double test of support in late Nov and early Dec and then proceeded to walk its way up in a saw-tooth, advance-and-retreat, action-and-reaction pattern.

Alternatively, if a descending trend-line is drawn across the tops of the lower highs, it can be seen that DXKSX has broken through resistance. In short, however one wants to mark up the chart, there was plenty of technical justification for putting on a position that also had plenty of fundamental justification for doing as well. But just because the evidence favors doing a trade doesn’t the trade will work out as hoped. There’s no reason prices couldn't reverse and re-test the lows. But now look at a 3-month chart. What do you see? That prices advance about 6-7 ATRs and then retreat 2-3. (For an explanation of how Renko charts are built, pull your reference manual.) Anyhow, looking at the chart from left to right, you see the advance-retreat pattern happened three times before I entered last week. So the high-probability bet was the prices would do so a fourth time, and I sat tight, rather than panicking out of the trade. Bingo! Markets reacted to Obam’s speech and spending plans with the scorn and disbelief they should have, and they sold the 10-year note. So I’m back in the money on the trade.

Over the coming months and years, there’s going to be a lot of volatility around bond prices, and the moves up in interest-rates won’t be linear or without reversals. But I’m willing to bet that the secular bull market for bonds is finally drawing to a close and that the correct market side for long-term investors is now short. Traders, of course, can continue to take pieces out of the price action from either side as they can catch them.

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