The Futures / Inter Market Report

Trading the World’s Markets                            

February 22, 2008

                                            
Matthew Caruso, CMT                                  
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10 year T-notes riding an overbought trend

            Before we get to the main point of this week’s article I would just like to comment on some of the markets we looked at the past few weeks. Crude oil and natural gas have just exploded higher. I don’t follow news to form my opinions; I just look at the charts. The main point I try get across in writing these educational (no actual entry point points are ever discussed) articles each week is the abundance of information that the charts give. Crude passed $100 per barrel only days after commenting on it. As well, natural gas has passed $9.00, although it took a little longer to reach its target than crude. The trends in these commodities are similar to those seen in other natural commodities; they are over bought, but still pointing up. Given their overbought condition, any faltering in the short-term trend should be regarded as a sign of an impending pull-back.  As well, the British pound has broken above its down trend line this week and it appears the trend has turned up and there is plenty of room for a large move up in that currency given its rather steep correction in recent months. I find the use of trendlines to still be a fantastic technical tool despite all the advancements in technology. I think classical chartists who sat in a room all day with just a chart, pencil and ruler had the right idea. 

All my forecasting has come from information solely obtained from the charts of these markets. The reason I wanted to make this point is that while speaking at 2 people at a recent Financial Forum here in Montreal, they were insistent that charts are useless and all chartists look at is past data, and the past can’t predict the future. I don’t want to get into a big discussion about this here, but thinking like that is why I write these weekly educational articles, to prove them wrong. I’m not perfect, far from it, but I like to think that what I’m showing here each week that you can obtain better results using charts than following blind luck.  Also, if anyone has any other data besides past data, I would love to see it because to my knowledge fundamental or quantitative analysts do not have access to data from the future.  

Great examples of the use of trendlines are the articles I wrote several months ago on June 8^th 2007 (http://tradesystemguru.com/content/view/57/58/), and October 19^th 2007 (http://tradesystemguru.com/content/view/98/58/) on the 10 t-notes. June 8^th was just days before the major bottom in the 10yr which led to the massive bull market seen in recent months. In the October 19^th article we saw the follow through and confirmation of the new uptrend in that market. The calls in this market have been some of the best I made since the inception if this weekly report and they were made using the simple and effective trendline. 

The 10 yr is still in an uptrend as you can see in figure 1. I decided to write about this market this week because it broke above its recent down trendline signaling the potential end to its recent consolidation.   I was hoping to see a pullback to the up trendline and moving averages but it has not done so. Added bullishness stems from the fact that bullish sentiment is at a bullish low, and commercial buying is at a bullish high. For these reasons, I believe we may have a move back up to test the highs. I am partially skeptical on whether new substantial highs will be made for 2 reasons. The red oval in figure 1 shows the strong gap up several weeks ago which was the culmination of the fast parabolic rise in the market. Such a sign of blow off buying is a sign of trend exhaustion in my opinion. As well, if you look to figure 2 you will see the typical seasonal pattern for this market. The first part of the year is bearish, not always but most of the time. These 2 factors lead me to believe that a test of the highs may fail. However, there is no confirmation of that for the moment and a break of the up trendline would be needed for that. For the moment we may have seen a short term low in this market and another test higher should follow, but keep your eyes open for any inability to make new highs.

Figure 1 Chart by genesisft.com

Figure 2 chart by genesisft.com

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