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360-289-9441(March 26, 2000) FINANCIAL INSTRUMENTS: U.S. TREASURY BONDS--The 30-year Treasury bond went from a high of 97:20 to a close at 97:02 on Thursday. That was definitely a bearish signal. On Friday it could rise no higher than 96:31 and closed at 95:01. Two days of low-fulcrum closes and clearly a "cycle down" pattern. The last two weeks have seen the bond move briskly up from 94:00 almost defying gravity as the FOMC moved to hike rates another 25 basis points, or so everyone expected. Dissemination of the FOMC report showed that 50 basis points was on the table. This important "inside" discovery might have been the catalyst to change sentiment of bond traders to bearish. Fed policy will also continue to diminish the inverted yield as long as the 2-year is above the 30-year yield. Greenspan had not wavered in his words of "hike, hike, hike" even as economic indicators showed a calming economy. The equity markets, though, dramatically and strongly rose, and so did the bond, cautioning those who believe that it only must move inverse to the Dow. But wait, just because the bond showed a strong cycle down signal does not mean that the downtrend has started; it is entirely possible for the bond to have a down cycle without changing its uptrend. It has happened before and the bond could come back. The fact that I had predicted higher interest rates by the end of summer, up to 6.5 or 6.75 and 7.0% by the end of the year can get thrown clear out of the window by the reality of the markets. Up, but clearly in a down cycle.
Crude price increases have been given as a reason for bond's weakness. Price pressures on the long bond are expected to continue next week.
EURODOLLARS--Going to December Eurodollars for added punch, we got it in spades Friday as futures dropped by 15-1/2 points, a remarkable move by this usually quiet market. Reasons are to be found in the dollar and the long bond. The breakout, and it is definitely a breakout from a defined sideways channel, came down with a gap from Thursday's low of 93.93 to an open of 92.895 Friday morning; an ultimate low of 92.78 and a close at 92.785. Novices who had placed GTC orders to buy-stop or sell-stop above or below the channel, or slightly declining triangle to be more precise, were rewarded on Friday, but the gap opening "stole" some important points from their entry. We will have to see if the downtrend will wash those tears away.
Stochastics had already been bearish for a couple of weeks; they are now with wide divergence and no overbought or oversold condition; RSI though is under 30 already and needs a pattern to give a signal for correction. Direction and momentum indicators are all bearish in all time frames; 9- and 18-day moving averages are in the "sell" camp, having crossed over a few days ago. Neither moving averages or stochastics were likely to have been used as trading signals because of the neutral to sideways direction. Recall that Eurodollars were in a long, long downtrend since last November. Down with a thud.
Martin B. Miller
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