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THE BOND THEN AND NOW
Prepared by Technical Data
A Division of Thomson Financial Networks
Since peaking at 122-04 in January of 1996, the bond has made two attempts to revisit that zone of all-time highs, only to stall near 117. The first failure in December of the same year was followed by an abrupt about face to the 106-12 level. The 10½ point slide took place over a short span of only five months. Market participants have apparently etched this occasion in their minds because on the subsequent retest of the 117 area in July of this year, sellers emerged once again to swiftly reject the contract back down to 111-26 in less than two weeks.
This, of course, roused investor concern over a possible repeat decline from this already proven resistance point. But technical arguments can be made that actually support the case for much higher prices from here. To begin, research conducted by Technical Data shows that although the first signal from ADX (Average Directional Indicator) is usually in the right direction, it is often too early. This predicament occurred with monthly ADX, which gave a buy signal during the first rally to 117, only to stall as a result of the price failure at that level. Likewise, weekly ADX was still downticking even though monthly ADX was upticking. The lack of agreement from these two very influential time frames resulted–not surprisingly–in a false signal.
Contrast this situation with current readings. There are now bullish ADX signals in all three major time frames (daily, weekly and monthly), each generated from very trend ready levels. Of course, Trend Intensity(r) (Technical Data's proprietary trend indicator) is also upticking bullishly, confirming this signal from ADX. The potential magnitude of an advance supported by bullish trend indicators in all three time frames is inestimable, but other technical tools can be employed to forecast a return to the old 122-04 high.
For instance, monthly MACD, a very reliable indicator for trend followers, never crossed up over its signal line on the first run to the 117 zone. It also never got down to the neutral “zero line” prior to the late 1996 rally. Recently, however, the monthly MACD has not only crossed up over the buy signal line, but did so after first failing to break down through the aforementioned “zero line.” In the other important time frames, weekly MACD has maintained its buy signal despite the recent pullback from 116-31. Daily MACD did cross down over the “zero line,” but the fact that there was no subsequent follow through selling is in itself a bullish sign (price ignored what is normally an ominous sell signal).
Finally, the first failure at 117 was followed by a break downward through both the weekly and the monthly middle Bollinger bands. Not this time though. Both bands joined forces between 111-18 and 111-25 on the recent drop to turn the tide back in favor of the bulls.
All told, the current technical environment can easily be distinguished from what prevailed in late 1996, building a strong case for higher prices in coming months. Granted, it may be tough going to get through the 117 barrier, but once we can put that point in our rear view mirror, there is essentially a pocket of air from there to 122.
September 22, 1997 David Lundgren, Senior Fixed-Income Analyst
Technical Data
A Division of Thomson Financial Networks
22 Pittsburgh Street, Boston, Massachusetts
Copyright 1997, by Consensus Inc. All American and Pan American rights Reserved. editor@consensus-inc.com
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