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GREENWICH NATWEST FUTURES
311 S. Wacker Drive, Chicago, Illinois
(December 2, 1997) FINANCIAL INSTRUMENTS: TREASURY BONDS–Treasury bond futures are in the midst of major uptrends on the daily, weekly and monthly charts. Bullish symmetrical triangle patterns apparent on the weekly and monthly charts target minimum upside objectives of 127.11 and 127.26, respectively. From a longer-term one to several month perspective, my analysis suggests that this market should be traded from the long side. I would view any significant downside corrections as potential buying opportunities.
However, from a shorter-term perspective, there are several technical warning signals of an impending downside correction:
–The market is technically overbought on the daily, weekly and monthly charts, while bearish divergence exists between price and momentum indicators in each of these time frames. (Bearish divergence occurs when a new high in price is accompanied by a lower high in a technical indicator that measures market momentum. This indicates technical weakness, and is often the precursor to a downside correction.)
–Open interest has been flat to declining over the last three weeks, although price has been grinding higher. The lack of expanding open interest during this period of higher prices indicates a lack of conviction by market participants that prices will continue higher over the short term, and is a bearish technical warning signal.
–118.31 represents the life-of- contract high (made during the week of 1-31-96) for T-bond futures on the weekly and monthly continuation charts. This is a major resistance level, which combined with technically overbought conditions, sets up a good technical environment for a downside correction to occur before prices continue higher. The market is currently negotiating this resistance area.
These bearish technical warning signals do not necessary mean that a downside correction has to occur from the market's current level. However, it is a good reason to tighten protective stops on long positions to protect open trade profits accrued on this major uptrend. Longs are advised to stand aside on a break below 118.09 support this week (an 118.07 trade would confirm a break of this support), as this would suggest that a downside correction is underway.
John Kosar
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