New Recommendations:
Buy March Treasury bonds at 128-00 or better and look for test of resistance at 132-00. Risk the trade to a close below 126-00. Sell March cocoa at $2,700 a metric ton and look to take profit at $2,400. Protect the trade with a stop loss at above the recent high at $2,925.
Fundamental Landscape
The global economic slowdown has been at the forefront of financial news recently and as concern over the economy has grown, so has the plea for relief from the U.S. government. It seems that the market, the nation and the world have been anxiously awaiting the Obama administration’s plan of action to correct the weakening U.S. economy. Recently, we have had a flurry of announcements from the President, the Treasury Department and the Federal Reserve in an effort to address that concern.
When the Senate passed the $838 billion economic stimulus plan with a vote of 61-37, the stock market’s reaction to the government’s plan of attack was decidedly disappointing. The equity markets dropped precipitously on Tuesday, February 10, and traditional safe-haven assets, such as Treasury Bonds rallied amid a flight to quality. Now a revised version of the economic stimulus bill is headed for passage in Congress by the end of this week after lawmakers agreed on a reduced $789 billion plan. So far, market participants still aren’t feeling terribly optimistic.
We expect Treasury bond futures to continue to rally amid the uncertainty. Although Treasury bond prices are near historic highs (and yields are near lows), we feel that the market landscape is right to support even higher bond prices. Much of the sell-off in the equity markets this week can be attributed to investor distaste for risk. Many analysts expect continued poor economic news, and a combination of weak corporate earnings and more possible bank failures could continue to drive money out of the equity market and into Treasury instruments.
Fed Chairman Bernanke had again reiterated in his address to the House of Representatives Financial Services committee that the Fed may look to utilize all tools at its disposal to unfreeze credit markets. This is a reinforcement of the indication that the FOMC gave in its statement from its last policy meeting. Many analysts believe that the Fed may look to open market operations, essentially injecting money into the economy by buying back U.S. Treasuries. This may be the next step in the administration’s plan to combat the recession and would likely be enacted should the market continue to break in spite of the economic stimulus plan.
Technical Landscape
March bond futures have sold off since the beginning of the new year from about a high of 141-24 on December 31, 2008, to the most recent low of 125-21 posted February 9, 2009. The market was unable to break resistance at 142-00, and proceeded to sell off to test support at the 50 percent retracement area at about 126-11.
The failure of the market to hold several closes below the 126-00 area and a technical reversal suggests a possible trend change with an upward bias. The charts coincide with a possible fundamental shift in the markets, as risk aversion again becomes preferred. The technical indicator is also reinforced with a crossover in the MACD, suggesting that momentum seems to be shifting to the long side of the trade. We recommend traders buy the March Treasury bond futures at 128-00 or better and look for a rally with an initial upside price target of 132-00. There will be minor resistance at 130-00, while the upside objective is 138-00. Risk the trade to a close below 126-00.
March Cocoa
On the commodity side, we see an interesting opportunity in cocoa futures. Looking at a daily chart of March cocoa, numerous technical indicators are in alignment on a bearish trade. The first thing that we are looking at is the divergence between the price, the Stochastics and the MACD. The market made a new high of $2,919 a metric ton on February 9, but the Stochastics and the MACD each made a lower high, thus creating a divergence. Also, if you look at the price action on February 9 (using candlestick charts), you have what is called a pin bar, and recent action created a reversal. The strong decline the market saw Tuesday also confirmed the divergence between the price and stochastics/MACD. We recommend selling at $2,960 or better, with a stop above the most recent high at $2,925. If you are willing to take a little more risk, you can enter the trade right now at the market, and risk the trade on a move to $2,925. Look to take profits at $2,400.
Please feel free to call us for more information about this strategy, or for other market-related questions you might have.
Dennis G. Cajigas is a Senior Market Strategist with Lind Plus, Lind-Waldock’s broker-assisted division. Dan Faretta is a Market Strategist with Lind Plus. They can be reached at 866-631-6216. Dennis can be reached via email at dcajigas@lind-waldock.com and Dan can be reached at dfaretta@lind-waldock.com.
Past performance is not necessarily indicative of future trading results. Trading advice is based on information taken from trade and statistical services and other sources which Lind-Waldock believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder.
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