Bond Apocalypse Beginning?

From the Chart Room | Alex Bernal, CMT - @AlexKOTM
Hey guys I've been slaving day and night getting the website launched and have not had much time to analyze the markets. But today I had to get the lead out and write up a possible trade that could be a monster winner going into the rest of the year. Rising interest rates. 

 Yield Curve Perspectives
Since early last year treasury spreads have been converging. Given that Spanish (nov) and Indian (dec) yield curves have inverted in the past few weeks there seems to be a global contagion for potential recession in the near future if not already. In my personal research I  have concluded that more often than not interest rates lead stocks. Considering that US interest rates have never been lower going all the way back to the founding of the nation one could clearly surmise that todays rates are not justified by normal market forces. This notion is further supported by the mythical "CPI" index which obviously does not properly reflect real inflation. Interest rates are deep in the negative territory and given the current governments perpensity to continually dig record deficits the word "print to infinity" is the only thing that I can say.
With the debt ceiling issues continuing to be in the spotlight it really looks like the curtains are again soon to be closed here in the bond market, or are they? How long can Lord Bernakes two step tip toe last? There is no doubt that the the velocity of the decline in interest rates over the past decade has created a refinancing frenzy which has given a windfall for both borrowers and lenders. However, I believe that the time is here when interest rates will establish a final low if not already (top in bond prices). Technically I think we are at this point and I believe the  bear market in bonds may of already begun in stealth. But lets not just rely on my economic beliefs lets look at the charts:

Monthly
The one thing that screams out at me here is that the downtrend in rates (uptrend in bond prices) is still very intact. The long term trend line in yellow displays the last line in the sand that when breached will be the final signal to the macro trend in interest rates confirming to the upside. So "technically" by the books a classic technical analyst would not get short bonds until this line is broken and confirmed. But since that is a long ways away from the current price level I just wanted to show you this chart just for a birds eye view and few curious indications. First notice the dual RSI measurments coming off of extreme over sold readings and have substantial multi month divergences (Higher RSI reading with Lower prices).This posture in RSI in summary displays that the current momentum in trend is decelerating. It has not accelearated in the opposite diretion yet, but when it does we will hopefully sure be compounding our position at this point. Additionally, I have layered the key Fibonacci time cycle and note we are sitting on a key cycle precepice that could be a turning point for bonds.



Weekly
As you can see we eclipsed the flight to safety blowout 2009 high and have been moving sideways in range. I have highlighted the key aspects of momentum with green arrows. Every time the DMI - crosses the ADX it signals a change in the over all trend. Crossovers in late 2009, late 2010 and (hopefuly Octber 2011) have seen major trend reversals to the upside in rates. Two different RSI measurements also have confirmed trend reversals with over sold readings coinciding with DMI - / ADX crossovers. In short I am not one to advocate steping in front of freight trains, but I like waiting till the train slows down enough that it is possible to jump on. I feel that the momentum to the downside in rates is at a point were it is possible see a trend reversal on the macro level.


Daily (execution chart)
So what are the triggers that I am looking at telling me to test the waters?If you havent noticed I use the Ichomoku Cloud system a lot. It is not my primary trading system but I like to couple it with other indicators to get multiple confirmations before entry. A basic way to use this is "Be long above the cloud and Be short below". After watching this system for some time now I can tell you that it works very well but you have to be aware of behaviors of certain setups. I usualy initiate a small first position when the cloud breakout happens then wait for a pull back to test the cloud from the opposite side. I have drawn the ideal price action in purple that I would like to see for my entrys. The first pullback being the point where I would add the bulk of my position. If I am wrong stop loss points would be trigged below the cloud or within the cloud depending on how its behaving at that time. I feel that with most trades if it does not go your direction immediately after you enter you are probably off in your timing and should scale down in size to protect capital. In opposite when positions go your way right off the mark then you should not be scared to add to a winner and really squeeze as much juice as you can out of it.

Additionally I like to buy breakouts when the ADX is reading below 15 because it indicates that the current daily trend is (not trending) and will start to in the next move. My first initial target is all the wayback up at the PRIMARY downtrend line that spans back to 1985. I would expect to see a flurry of activity at the level as some wil see it as another chance to buy support in bond prices. I always use a stop loss and weight my risk  vs  reward on every trade. I also like to hold positions for long periods of time. When rates do rise, the cost of money will further squeeze the bottom line of the S&P 500 already fragile bottom lines. I expect the Market to follow suit shortly after.