Thursday’s Setups

• October 31, 2001
• TradingMarkets Editors

T-bonds
(
USZ1 |
Quote |
Chart |
News |
PowerRating) were obviously the place
to be as they catapulted in their biggest day in over 13 years. USZ1 jumped
nearly three whole points today on the Treasury Department’s announcement it
will discontinue issuance of 30-year maturities. T-bonds exceeded expectations,
blowing through yesterday’s
targets.

This column makes use of the
Off The Blocks
setup frequently, because it helps get traders in on momentum markets —
either up or down — with limited risk early in the session and helps keep one out
of the market on a failure to follow through. Note that T-bonds
have made good on an OTB long entry in six of the past seven sessions (with just
a three tick money stop below the low of the opening five-minute range, it is
seven out of seven).

Now that the Treasury Department said jump, we ask
“how high?” With T-bond supply drying up, pension funds, insurance
companies and other institutions with long-dated instruments need securities
like the 30s to match the durations of their obligations. After such huge gains,
the market will reassess.

The long bond may not go away forever. The Treasury,
after all, did not say they would never issue 30s — or some longer-dated
security — ever again. Although the government is unlikely in the
short-term to issue long bonds, it is going on a spending spree in an effort to
prop up the economy: Bush is asking for $70 billion in fiscal stimulus. How will
that be paid for with the budget surplus quickly vanishing?

Also, financial markets embody evolution and adaptation.
As Tony Crescenzi, TradingMarket’s economic honcho, points out in Crescenzi
On The Economy today, “The quantity of long-term supply may
not actually change much.
After all, the Treasury issued just $15 billion of 30-year bonds both
this year and last year.
Corporations and government agencies such as Fannie Mae can easily fill
the void created by the Treasury’s announcement.” In short, the fear
of a shortage here may be overdone and so too may today’s rally. Although the
immense momentum, freight-train bar today will be difficult to stand in front
of, the market was capped at some significant resistance today. Consider tests
of any “Soup” our double top formations on probes of resistance in the
111 22/32 to 111 30/32 areas. Much higher lies 114 10/32.

Today’s discontinuation of the 30-year instruments achieves
an objective of the Fed to lower long-term interest rates. But a way to keep
long-end rates down is to cut the Fed’s policy tool federal funds target rate
more gradually. With two 50 basis point cuts coming in the past six weeks, the
Fed may start to take its foot off the gas. December fed funds futures
(
FFZ1 |
Quote |
Chart |
News |
PowerRating) priced in a high of a 100% chance of another 50 basis point cut by
Christmas. When that market is fully, fully priced at the highest expectation,
that is a good place to look to fade it. Consider shorting this market below
today’s high of 98.00.

Japanese yen
(
JYZ1 |
Quote |
Chart |
News |
PowerRating) are a continuation short out of their head and
shoulders top and triggered today out of a Pullback
From Lows setup. The market closed at .8200, a pivotal area intraday.
Consider shorts if yen open below this area. The next resistance area to
consider shorting is at .8225

Also in the currencies, euro FX futures
(
ECZ1 |
Quote |
Chart |
News |
PowerRating)
and

Swiss francs
(
SFZ1 |
Quote |
Chart |
News |
PowerRating) held yesterday with tails left at the 50%
retracements of their declines from recent highs. They also triggered Pullback
From Lows, so look for a continuation to a test of the recent lows.

Contract	Symbol	Setup	Direction	Trigger
T-bonds	( USZ1 | Quote | Chart | News | PowerRating)	Overextended	Down	111 23/32 to 30/32 then, 114 10/32
Fed funds futures	( FFZ1 | Quote | Chart | News | PowerRating)	Fading the fully priced expectation of .50% rate cut.	Down	Below 98.00
Japanese yen	( JYZ1 | Quote | Chart | News | PowerRating)	Pullback From Lows	Down	Below .8200 or at .8225 resistance
Euro FX futures	( ECZ1 | Quote | Chart | News | PowerRating)	Pullback From Lows	Down	Continuation short setups

Use stops on every trade.