What To Look For In A 15-Year. . .

  • June 7, 2001
  • Marc Dupee

Institutions, hedge funds, and traders of all stripes
continued bailing out of the

British pound
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15-year low. But at these newly depressed levels, it might be sanguine to look
at what’s right about the pound rather than what’s wrong with it. 

The pound gapped lower for a second straight session,
tested the low in an intraday Turtle Soup Buy reversal and then rallied
through the session to close down just four ticks or .0008 at 1.3898. The
prevailing negative view here is that the Labour Party will sweep into office
and join the single-currency euro bloc by 2002. When the pound melds with the
euro, prevailing wisdom is that the pound will be substantially weaker than it
is now.

As George Soros describes in his Alchemy of Finance, markets
overshoot and remain overextended for long periods. This could likely occur with
the pound. But when and if calm returns, traders will again focus on
fundamentals and may find the pound enticing. 

Currency valuations are based on comparative interest
rates and expectations of comparative economic performance. The UK’s 5.25% rate
is 1.25% above the US’s 4% with Britain expected to leave rates unchanged. A
full 25-basis-point cut was priced into the Fed Funds futures today, yielding a
highly accurate prediction that the US short-term benchmark is going down to
3.75%. A 1.5% interest rate differential is substantial and will attract
institutions to buy the pound.

On the economic front, Britain has had its livestock and
tourist industries battered by mad cow disease but is, nonetheless, resisting
the global slowdown better than continental economies. Historic lows in
unemployment and inflation underscore these points. 

The question becomes, in part, when should traders begin
discounting the UK’s entry into the euro single currency-bloc? The earliest that
entry would occur would be in two years with 2004 the more likely objective.
This implies that there is a lot of early discounting going on, perhaps too
much, based on economic fundamentals. Meanwhile, a short-term gap looms overhead
at 1.4076. This will be a likely point to expect a retest. 

In other financials,
September T-bonds
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38.2% decline from their March to May plunge. The prospect of the next leg up in
stocks also appeared to pull some money out of bonds (in expectation of an
equity rally) and propel a 19/32 drop to 100 14/32.

Stock index futures closed mixed with now-front-month
September Nasdaq 100 futures
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and going out near their highs ahead of Intel’s mid-quarter earnings
review. 

Sugar formed a Pleiades pattern, a new setup I have
been observing and testing. The Pleiades, or seven sisters, is a star constellation I used
to use (prior to cheap satellite navigation devices) to determine a yacht’s
position with a sextant while making ocean passages. The pattern reminds me of
the constellation. In essence, the pattern is a consolidation pattern where
several bars — up to seven –  open and close at the same levels, forming
Doji bars, similar to small stars. A move in the direction of the recent break
and out of the “star” consolidation range is your entry and
directional cue. Sugar closed .10 lower at 8.50.

In an intraday example of a Pleiades pattern, have a look
at September T-bonds
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higher this morning, but just prior to breaking down, traced seven Doji
(star-like) bars before breakout down out of their range and falling half a
point. 

 

August gold
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on the dailys. Gold closed where it began, up .2 at 267.3.

Cocoa
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low out of a 1-2-3 Pullback From Lows setup, closing 41 lower at 904. Notice how the pullback went back
to test the critical 950-960 area. Cocoa is down in part because of improved
forecasts for the Brazilian cocoa crop. 

August lean hogs
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trigger pulled back to the trigger and then regained lost ground to finish up
.175 at 64.825 and near the contract’s high. August pork bellies
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traded within the confines of a recent triangle, gaining .550 to 79.275.Â