Treasury bond futures have been in a downtrend for much of the year. Bearish factors have included concerns about the size of the US budget deficit, inflation concerns, and a growing belief in an economic recovery in 2H 09. Friday saw a sharp decline as a strong (well, less weak than expected) jobs report led to a downside breakout under support at the double bottom at 114-12 (the blue horizontal line on the chart). This broken support at 114-12 will now serve as resistance on a rally. Friday’s break set up a momentum buy signal for yesterday; yesterday’s trade saw both Friday’s low and the 114-12 level. Bonds ended up closing around where they opened; the doji, inside day and range contraction gave a breakout setup for today.
A breakout setup occurs when a market shows signs of range contraction and indecision. Narrow range days, inside days and dojis are some of the conditions I use as evidence for a breakout signal.
On a breakout day, I look for a market to break through close in support and resistance, and then I use that breakout as a springboard to a bigger directional move. For the September T Bond futures today, I’d be looking to buy a break above the 114-12 resistance, or sell a break under Friday’s low at 112-31. (For Trade or Fade followers, the breakout points are 114-08 and 112-20) The fact that momentum gave a buy signal yesterday has me guessing that a breakout (if it comes) is likely to be to the upside, but I try to stay agnostic as to direction on breakout days. I added a trendline and Fibonacci retracements to give some ideas for profit targets. Treasury is auctioning a 3 year T Note today; maybe the release of the results at Noon Central will be the catalyst for a breakout.
Breakout setup is circled
