A Bear Trap In Bonds… [Dirty Dozen]

If you have an inflexible image in your mind of an opponent, then whenever he changes, your evaluation of him will be wrong. If you have an inflexible image in your mind of yourself, then whenever you change, your evaluation of yourself will be wrong. For up-to-date evaluation, there is no time but the present. ~ Tommy Angelo

In this week’s Dirty Dozen [CHART PACK] we go through market positioning, a developing setup in bonds, some Agg shorts, and a long in small-caps, plus more… 

1. Aggregate positioning going into the week shows speculators continue to be very short USD, long precious metals, increasingly long energy, and crowded short in bonds. 

2. The most crowded longs are cotton, Dow Jones,  and EURUSD. For shorts, it’s the DXY, 5yr, and 2yr Treasuries. 

3. I’ve been closely tracking the setup in Bonds for the past month. I think buying bonds will be a big trade going into the year’s end. But we need to be patient with these things and wait for the tape to signal a likely bottom is in and for our leads to confirm. 

I’ve been waiting (hoping) for a puke below the YTD range sparking a bear trap reversal. And we may see this trap get put in over the coming weeks.

4. Copper/Gold (blue line) is beginning to diverge lower (black line is 10yr yield). Ideally, we’ll start to see our other leads begin to trend lower while yields creep up. 

5. I’m looking for a move similar to the one we saw in the lead-up to the major bottom in bonds in November of 2018. Yields put in a double top while all of our yield leads traded down.

6. Speculators are crowded long in cotton and the daily chart put in a potential double top last week. This is not a bad R/R spot to get short with a risk point nested in right above recent highs. 

7. Cotton is coming off near 2std above its 20, 50, and 200-day moving averages.

8. Cocoa is another market coming off of crowded spec positioning and extreme technical extension. I’d look to short on a bounce back to or slightly above the Bollinger Band midline. 

9. Cocoa trade backdrop: technical overextension (2std+ > 200dma), very crowded spec positioning, and money manager sentiment in the 100th percentile, plus valuation oscillator in the 100th percentile as well. 

10. I don’t have a strong view on equities at the moment. The bearish positioning and recession narrative that made us lean long all year has been played out and the market is trying to find a new narrative to fit the bullish tape. 

Market internals are still mostly positive and so I’d think this dip gets bought here. But that’s a weak opinion, weakly held. 

Cycle and seasonality have flipped to a headwind. Combined with the Bull Volatile regime and Trend Fragility north of 80%, we should expect a bumpier ride for the second half (chart via NDR). 

11. Someone sent me this chart from HSBC showing multi-asset fund equity exposure surging. No doubt these clowns are piling into MSFT, AAPL, NVDA, and GOOGL at the moment, so we should look for a developing top in those names. 

12. If your’re looking for a quick swing trade the setup in the Russell is playable, though this trade could be nullified by morning time when this prints. But we have a pullback double bottom to the lower band within a Bull Quiet regime. Specs are short and you can nest in a stop tight, right below Friday’s low. 

Thanks for reading.