December 28, 2009

US Treasury Futures

With what feels like the entire financial world staring at the current bounce in the US Dollar, are interest rates perhaps the real story?

The above three daily line on close charts represent, from left to right, Two, Five and Ten Year US Treasury Futures. A 50 and 200 moving average (red and blue respectively), as well as an Ichimoku Cloud are plotted in the price action area. A blue trend line connects swing lows from Jun 09 and Aug 09, and a shorter back trend line connects the swing low from Oct 09 to today's current price level. Blue vertical dashed lines denote the aforementioned swing low dates. In the sentiment area of each chart is a 14 period RSI, with several accompanying lines - the most important for this chart study being the solid and dashed, red and blue horizontal lines (bearish and bullish support and resistance lines accordingly). Again, a black line connects the Oct 09 swing low to the current level.

At first glance, the Two and Five Years appear to present an RSI Positive Reversal (higher low in price, lower low in RSI) between Oct 09 and present. Several indications weaken the case for this signal, as we'll see in this analysis. Regarding price action, only the Two Year contract is holding at or above its Cloud. Clearly the Five and Ten Year contracts have broken below their respective Clouds. Secondarily, each contract has broken below its 50 period moving average, with the Ten Years falling further below its 200 period moving average as well. Last, but certainly not least, each the Five and Ten Years have both broken the uptrend line (blue) drawn from the Jun 09 and Oct 09 swing lows - a clear warning sign as to possible reversal.

As to the sentiment behavior, individual RSI levels themselves in each contract weaken the possibility of an RSI Positive Reversal. First, the Two "hit" a bullish resistance level near 80 (dashed blue horizontal line) on the last swing high from late Nov 09. The subsequent fall dropped below the bearish resistance level near 65 (solid red horizontal line), and then fell hard of a bounce recovery early in the month. The current level has dipped below bullish support near 40 (solid blue line) as well - a sign of trouble ahead. While the Five and Ten Year contracts did not achieve 80 on the long end, each fell similarly hard as well during the same time period, and are both further below RSI bullish support near 40.

Not shown in the chart above is the weekly price action in the same three contracts. A quick review is warranted, where technicians will note three distinct and individual behaviors. First, the Two years have been rising unabated for months. During the last several weeks, however, the Five Years had been forming a repeated top, before breaking through temporarily. The Ten Years, however, were trapped in a wedge pattern, not only failing to make a new high, but presently challenging the lower leg of that wedge. Should the wedge in the Ten Year contract be broken to the downside, technicians should look for continued near term follow through in the US Dollar recovery, and a subsequent rise in interest rates. That same scenario does not play well for US securities held on margin, so a continued ease in the rise of US equities may be expected as well.

Jeffery E. Lay, CMT
President
Talon Eight, LLC

Disclaimer: This post is intended solely to disseminate information, and is not, and shall not be construed to constitute financial, investment or other similar advice. All posted material should be independently verified for accuracy and current applicability. Readers of this post are referred to the Risk Disclosure for further information.

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