Trader's Daily Notebook: Buying the Dip in Bonds May Not Be a Bad Idea

 | Jul 10, 2017 | 7:00 AM EDT
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Stock quotes in this article:

QQQ

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IWM

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TLT

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xle

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OIH

The July fourth holiday-shortened trading week provided a decent amount of volatility for the day timeframe participant. But beyond the intraday rotations, very little was accomplished when viewed over a higher timeframe.

As far as the week's closing figures are concerned, the SPDR S&P 500 Trust SPY gained around $0.30, the PowerShares QQQ Trust (QQQ) clawed its way to a whopping $0.12 gain, and the iShares Russell 2000 ETF (IWM) , the index that's been consolidating near swing highs, declined roughly $0.40. All in all, it was a good week to either be on vacation, or trade with an incredibly short time horizon.

Unlike the equity indices, which essentially spun their wheels for the past four trading sessions, bonds took a bit of a dive. For the week, the iShares 20+ Year Treasury Bond ETF (TLT) declined approximately 1.9%.

iShares 20+ Year Treasury Bond ETF TLT -- Daily

Several readers asked if I had any interest in buying the current dip in bonds. Depending on your risk tolerance, it might not be a bad idea at all. Based on the chart above, I'd consider buying into bearish extension toward the year-to-date (YTD) volume-weighted average price (VWAP), especially if it occurred early in the week. Consecutive closes under the YTD VWAP would be a warning sign for dip buyers, while a close under $120 would be a an obvious break of a prior swing low.

Alternatively, one could wait for a close above the 50-day and 200-day moving averages (MA) before getting long, and use whatever the current swing low turns out to be as a stop.

Another area I expect traders to stalk this week is energy. While crude is still holding above its most recent swing low (approximately $42), both the Energy Select Sector SPDR (XLE) and VanEck Vectors Oil Services ETF (OIH) put in (potential) double bottoms on Friday.

Energy Select Sector SPDR XLE -- Daily
VanEck Vectors Oil Services ETF OIH -- Daily

I don't have a preference between the two ETFs, but if I trade them, I won't be holding them beneath Friday's lows. And in both cases, assuming you're trying to maintain a position for longer than an hour or two, you'll want to see them close above their 50-day MAs before having any degree of conviction that a higher timeframe tradable low is in place.

Moving on to Monday's E-Mini S&P 500 futures (Es) auction, we'll begin the day focused on 2417.75 to 2419. As long as any bearish gap either quickly recaptures that zone, or dip buyers step forward and immediately defend it, we'll look for a test of 2424.25 and possible bullish extension toward 2429.50. If a responsive seller is going to step forward and reverse Friday's gains, he'll need to do so beneath 2429.50.

E-Mini S&P 500 futures (Es) -- 5 Minute Volume Profile

A failed trade from 2417.75 to 2419 encourages sellers to take aim at Friday's 2412 intraday low, eventually filling that session's bullish gap and testing Thursday's 2408.25 volume point of control (VPOC/Value). A session close beneath 2408.25 immediately shifts our focus toward 2400.75 and new swing lows.

Any trading or volume profile related questions can be posted in the comments section below, emailed to me at parkcityyeti@gmail.com or posted to my twitter feed @ByrneRWS.

Eat, Drink and Talk Money with Jim Cramer

Meet Jim Cramer at an exclusive reception at his Bar San Miguel in Brooklyn, N.Y., on Tuesday, July 25, from 6:30 p.m. To 9 p.m.

The evening will start with a screening of Jim's CNBC show Mad Money. Afterwards, Jim will join the party fresh off of the CNBC set to mingle, take photos and answer your investing questions.

Tickets include dinner, drinks and an autographed copy of Jim's book Get Rich Carefully.

Click here for more information or to buy tickets.

Where: Bar San Miguel, 307 Smith St., Brooklyn, N.Y.

When: Tuesday, July 25, 6:30 p.m. to 9 p.m.

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