Bonds Refusing to Follow the Script

I think this week's reaction hasn't adequately discounted the bearish news or the impending debt overhang. The final -- and arguably most important -- piece of economic news this week is Friday's report on the U.S. employment situation.

The report is expected to show that employers cut 25,000 jobs in April. If the payroll number doesn't stray too far from the consensus estimate, T-bonds and 10-year notes could drop in anticipation of an onslaught of government debt the following week. But the impressive behavior of debt futures suggests they will continue to climb a wall of bearish news.

Anatomy of a Setup

Not all trades work out, but the idea in any trading setup is to identify and exploit an edge. Monday's pullback-from-high setup in July soybean meal (SMN3:CBOT) has turned into a sizeable advance.

Bean meal had the hallmarks of a classic pullback setup. The contract had demonstrated momentum, and on Monday, meal gave a stronger-than-normal sign that it was good to go by lapping open above Friday's high and triggering the setup. The risk on the trade was just below Friday's 180.50 low.

Similarly, July coffee (KCN3:NYBOT) has set new two-month highs for the past few days out of its pullback. As the examples demonstrate, the pattern occurs frequently in both upside and downside momentum markets and is easy to identify and execute.