From Stonks to Bonds: ES->ZNThis is another relatively simple idea. As we are at the end of July we can start to take a closer look at monthly charts.
1. August has finished down (open to close) 60% of the time (12 of the last 20 years).
2. Coming into major multiyear trend lines, August seems to have been pivotal... literally.
- August 2007 dropped and pierced support but closed above the trend line providing the last bounce before breaking the uptrend a few months later in November 2007.
- August 2015 opened below the trend line, tried to stay above but ultimately collapsed.
- August 2020? Well here we are in the last week of July retracing the break of the trend line from back in February 2020. With point 1 above and where we currently are in relation to this trend line, this will be important to watch this week. A close at or below the trend line is bearish and this ought to sell off for the next few months. A close above will indicate a bit more of a neutral to bearish stance.
So what exactly does this all mean?
- Simply put a rotation from stocks to bonds.
How to interpret this:
- When this chart goes up, the e-mini SP500 futures will outperform the 10 year note futures.
- When this chart goes down, the 10 year note futures will outperform the e-mini SP500 futures.
Outperforming isn't what you think...
How one of these can outperform the other is:
a. One goes up more than the other.
a. One goes up while the other stays flat.
c. One goes down less than the other - aka one sucks less than the other.
d. One goes up and the other goes down (typically unlikely but still possible).
How to play this:
In order to accurately play the situation described above, there would be a simultaneous short position in ES1! and a long position in ZN1! in equal weight (notional value of the contracts).
In relation to outperforming:
a. The ZN1! long will make more than the ES1! short would lose.
b. Same thing as 'a'.
c. The ES1! short would make more than the ZN1! long would lose.
d. The best scenario, ES1! short makes money at the same time the ZN1! long makes money.
