The Futures / Inter Market Report

Trading the World’s Markets                            

March 28, 2008

                                            
Matthew Caruso, CMT                                  
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30 yr bonds due for substantial correction

            I have taken a look at the bond market several times in the past year.  Since I’ve begun to write these weekly articles the charts have told me that the bond market was bullish. As recent as February 22 I wrote of the oversold condition in the 10 year which has since then led to a good rally (http://tradesystemguru.com/content/view/156/58/). I’ve been bullish Since June 8^th of 2007 (http://tradesystemguru.com/content/view/57/58/) which is as close to the low in bond prices as you could have hoped for. (See also, http://tradesystemguru.com/content/view/98/58/). 

            I’d like it if you looked over these articles so that you’d know where I’m coming from this week when I’m finally saying that the run looks to have exhausted itself. As you will see, we have reached overbought condition very typical of bond tops. 

            In my market research I have found that the 65 week moving average is a very good indication of trend for the stock market. Since that discovery I have found that to be true in most other markets as well. Therefore, I took the liberty this week to study how price reacts relative to this moving average in the 30 year bond market. I essentially subtracted the 65 week moving average from price to see when prices are significantly above this moving average and due to revert to it.  Could such a simple technique have nay value? I think so. 

            If you look at figures 1 to 4 you will see all the times when price has become significantly above the 65 week moving average. For a longer term view of this please look at figure 5. As you can see, when prices extend too far from the 65 week ma, it is pulled back to it like a magnet. All major tops in 2005, 2003, 2002, 2001, 1998, 1996, 1995, 1993, 1989 gave signs of an over extended market. I have to say that that is very impressive; it isn’t often in market study that you find indicators with such high accuracy. If you take a quick look at figure 1 you will see that we are now at a level in the market vs. the 65 week ma that is synonymous with major tops in this market.  (more lower down). 

Figure 1 chart by genesisft.com

Figure 2  chart by genesisft.com

Figure 3  chart by genesisft.com

Figure 4  chart by genesisft.com

Figure 5  chart by genesisft.com

            However, despite all of this we need market confirmation. The uptrend that I mentioned in February is still in force as you can see in figure 6. However, long term factors that we discussed lead me to the conclusion that the up trend line will be violated. Accompanying the over extended trend is bullish sentiment and a bearish seasonal pattern, both which can be seen in figure 6 as well.

Figure 6  chart by genesisft.com

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