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Glitter Bombs, Bill Gross, and the Public Whipping of German Bonds

If you haven’t heard of the huge sell-off in German government debt, it’s a heck of a story

by Nico Isaac
Updated: June 11, 2015

Let's be honest. There's never going to be a superhero called "Technical-Analysis-of-Financial-Markets Man." A walking stick figure made of charts and trendlines, on the excitement meter it would pale in comparison to fundamental analysis, with its daily, dramatic plot twists of news and events that supposedly move the markets. 

But on June 9, technical analysis nerds got their revenge when bond legend Bill Gross posted this tweet:

"Reverse head & shoulders (yields) in all global bond markets. Necklines being broken by the hour. Bearish."

In the words of one analyst cited in a June 11 MarketWatch,

"That someone as revered as Bill Gross uses [the head & shoulders technical pattern] is incredible."

Even more incredible is that Gross was nearly alone in preparing for one of the worst global bond routs in recent history. On April 22, Gross publicly declared German Bunds the "short of a lifetime" -- a call that went completely against the mainstream consensus.

For them, the day Mario Draghi got glitter-bombed at an April 14 press conference, was the day the bullish trend in Bunds was sealed. After all, the European Central Bank President greenlit 1 trillion euros in bond-buying through September 2016. Bond prices had nowhere to go but up.

Here, these news sources from the time capture the widespread bund bullishness:

"This is distinctly positive for all eurozone fixed-income markets and especially Germany. It is now just a question of time until we get to zero on the German 10-year bond yield." (April 16 Wall Street Journal)

"The assessment of investors is becoming clear - prepare for ever-lower yields [and higher bond prices, which move inversely to yields – Ed.]." (April 14 Bloomberg)

Yet, two weeks later, the trend in ever-rising bond prices/ever-lower bond yields reversed. On April 29, German Bund yields turned up from .05% in a record-shattering 100 basis-point rally to 1.015% on June 10 as Bund prices collapsed proportionately -- the worst bond rout in eurozone history.

But, as incredible as Gross's "short" call was, the pro-"techie" movement has a long ways to go. One blogger quoted in the June 11 MarketWatch article says technical analysis violates his "Crayola Crayon's Rule":

"Drawing lines on a chart... is not financial analysis. It is an adult version of drawing. It should also be noted that 'head and shoulders' is a type of shampoo, not a useful market indicator."

Call us nerds, but we couldn't disagree more. We HEART traditional technical models like trendlines and frequently use them to reinforce our Elliott wave analysis of financial markets -- like German Bunds, for example.

On April 22 -- the same day as Gross's bearish bund call -- our European Short Term Update showed the following chart and wrote:

"Prices remain in a well-defined, parallel trendchannel. We will not entertain a bearish scenario for bunds until that channel is broken. The lower level of that channel comes in now at approximately 158 on the nearby futures contract."

On April 29, prices broke the lower trendline, confirming the bearish reversal. Our European Short Term Update wrote:

"We have been waiting, waiting, waiting for a bund price break, and today it occurred... ...we are open to the potential of a larger decline if prices break the lower weekly Keltner channel, now at 153.

"The persistent equity bull market has been built, in part, on the perception that the central banks are in control. A sharp decline now in bunds would shatter that perception."

According to the latest European Short Term Update insight, the implications of the Bund sell-off are much greater than you may think:

"In recent post-crisis years, equities have made corrective lows at junctures similar to the current one. But the recent debacle in bunds and other rate markets is what's different now."

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