Today, I will show and discuss today’s day trading and bond market lesson below. Just one trade here for the session and that is all I needed as it was a good quick trade towards a trade to target. All we had after that was slow small scalp trades available, which I did not take. I did just before this trade take two scalp trades in the NQ Emini futures and will that chart below this. There you can see that after the big drop, we had very little action the rest of the session.

Lastly, I promised I would show the two minute time chart with the market turning points that I talked about and showed yesterday  so that is below this chart also. I never use any indicators of any kind just the bar chart and I do make trading decisions from this chart with the method. The time charts and the tick charts both showed the same entry and pointed to the method trade too target at the low of that move.

I had a comment from someone who follows me and it was related to my comments from yesterday’s post and the 30 year bond market chart I posted. I generally explain how bonds work and how they are related to stocks and our current market environment.

I will comment on your bond question as you described it. In general if bond prices are low, they will be offering good interest payments for the bond buyer. A bond is basically an “I owe you” and promise to pay. Again generally speaking a bond will be issued at Par value usually 100 and say at that price it is paying 5% interest. It will pay you 5% interest for the life of that bond if you never sell it and at the end you will get all your money back in a lump sum payment. If the price falls to say 90 the new buyer at that price will be paid a higher interest rate than the 5% and he has a chance for the price to increase like a stock. If the price were to increase back to 100 and he sold it after one years, he would make 10% in appreciation on the increased price and gotten the interest of better than 5%.

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If the bond is say a 10 year maturity, no matter the price it will only pay the holder par value at the end and that was 100. So if a bond is priced at 120, the holder at the end of the term is only going to get 100 which is a loss of 20%. It may be his plan to only hold the bond for 1 or 2 years in the hope that it will appreciate in price and get the interest along the way. If he bought it at 120 and it went to 126 he made 5% appreciation and the interest.  (Side note: price will tend to trade back towards par value as it get closer to maturity.)

If a new buyer picks up that same bond it will pay less interest as the price is now higher. The higher the price of the bond, the less interest it pays and if that buyer holds it to the end of the term he will take a big loss. So knowing when the contract term is due and being sensitive to its price is key.

Currently, the US 30 year bond is in the stratosphere around 148 but will only pay off at 100 many years down the road, but no one would plan to hold it to term at these levels and any buyer would be looking at picking up the interest which is better than any bank or money market would pay, but no one wants to be the last one holding the bag when prices go down, so prices tend to slide fast just like a major stock sell off. For buyer who paid 80, they are sitting pretty as there return in interest is very high and there appreciation is great if they sell it back onto the market. They could hold it until the end of the term and be sure they will get paid par value at 100.

Its a complicated process, but that is generally how the mechanics of it work. As the Fed push on there end to lower the discount rate, it has an effect on the open market bond prices to some degree. The market will find the new value and trade in a range.

What I meant about the Fed behind the curve is that, if the current market continues to sell off, real interest rates are rising and the Fed is behind in there effort to raise the discount rate which is the rate that the Fed lends to banks for the very short term. So, the Fed will have to raise interest rates way sooner and much bigger if the market continues to sell off and that could catch the investment community by surprise since no one is expecting the Fed to raise rates now.

This is what happened back in the 1987 stock market crash. The exact same thing. Bonds were saying that real interest were rising with sharp sell offs in bonds and the Fed just sat on their on hands and did nothing until it was to late and they had to raise the discount rate a lot and that freaked everyone out and the market crashed. The market had started to already sell off but it just kept coming so fast in the weeks leading up to the crash. I remember it clearly as I seen it coming and was short options on Phillip Morris and a few others.

As interest rates rise, the stock market now has competition for funds because people can now get a decent rate of return and money flows out of stock and into bonds which can stabilize bond prices but no one wants to buy a bond when it is in free fall so lots of money sits on the sidelines waiting to enter bonds at a favorable price that will work for them and their plans.

Today in the 30 year bond market we saw a very big move up as I had mentioned yesterday that the level we were at was critical to hold, 148. Prices stopped there and today rallied up two and half points to 150 & 16/32nds. That is a very big move for just one day so that was nice to see. We could easily move up to right around 154 and or a touch under, but that would be roughly a 6 point move. A 6 point move is equal to $6,000 dollar when trading 1 bond futures contract.   I will show a chart of the Daily 30 year bond market tomorrow with the general market turning points, so until then, best trades to you all from Vince at Sniper Day Trading.

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