 | Stochastic
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60 Min BEARISH 76.35/81.13 |
100 Min BEARISH 81.00/84.00 |
Daily BULLISH 77.72/70.67 |
Weekly BEARISH 48.22/52.88 |
Monthly BEARISH 81.41/83.81 |
| Both the Sixty and Hondo fell leadenly to downcrosses in commencement of a key downcycle, which will determine the power of the Daily. The Daily spurred fresh gains well beyond its 129^00 objective in the workout of its bullish divergence at "A-B", but will now face the downcycles of the Sixty and Hondo, plus 2 immediate bearish gaps below. The Weekly havered in the shadow of the Daily’s sinewy workout in this the 8th week of its continuing downcycle. The Monthly memorialized its downcross on 11/30/98, marking the end of the secular bull market begun 06/97. To repeat the caveat carried since 09/01/98: "ENDGAME PROFILE: THE MONTHLY HIT A HIGH OF 92/88 K/D. THE MONTHLY STO PEAKS AT THESE LEVELS HAVE NEVER FAILED TO CALL THE TOP." |
In early December, 1996, StoMaster held:
"Within the context of a slowly emerging bull market as adumbrated by the Monthly's upcross on 12/02, it should be remembered that the Weekly's downcross of 12/16, marking the exordium of its bear cycle, will weigh heavily on the market until the end of January, or early February."
Early in 1997, StoMaster maintained: "The recrosses of both the Monthly and the Weekly to the upside and subsequent downside in mid-February have not yielded the bullish profiles required to catalyze the secular bull move anticipated for 03/07. This in no way implies a bear market in the offing, nor does it abstract from the eventuality of the bull call, but merely extends its commencement to the the end of the Federal Reserve tightening cycle, or until the long term technicals repair themselves."
To put events in prospective (this written as of early March 1997), "the bond market has established a range between the June 12, 1996 low of 105.10 and the February 18, 1997 high of 114.08. This ostensibly wide chasm represents only 90 bps in the 30-year bond yield. The past retracements since 06/96 have been neither secularly bullish or bearish. However, it is StoMaster's strong belief that the next bona fide secular move will be bullish."
Finally, in March 1997, StoMaster asserted: "With the FOMC 03/25 firming of the Fed funds rate by 1/4 % to 5 1/2%, bonds will be hard pressed to find a bid in the near term, not because of the higher interest rate environment, but because this marginal tightening leaves the door open to and, in fact, mandates at least 2 more 1/4% increment bumps. The bond price prognosis would be considerably improved had the Fed raised the funds rate by 3/4%, admittedly a politically infeasible alternative. Nevertheless, had it occurred, the bond vigilantes would be unimputably sanguine in the knowledge that no further firming was contemplated, nor required. In that climate, bonds would have improved as they did on 11/15/94 after the Fed raised the funds rate by 3/4% to 5 1/2% on the heels of four prior marginal tightenings commencing on 02/04/94, with the funds rate at 3%." For a full analysis, see StoMaster's "THE FED-OUT OF CONTROL" [Now enabled for "Telerate - A Bridge Company" users.]
Also, check out StoMaster's newest seminal piece on how a fundamentally changing yield curve will affect the bonds at "A CURVE WITHOUT BEND-THE NEW BOND VIGILANTE FLATLINERS"
And finally, to fully understand why the secular bull market in bonds begun 06/97 is now in its final stages, "THE STO DON'T LIE" is a must read. [Note: This is a .pdf file requiring the Adobe Acrobat plug-in or Reader.]
CURRENT TECHNICALS
Flash Points
Sixty and Hondo
Both the Sixty and the Hondo forged predictable downcrosses and now are diametrically opposed to the Daily’s upcycle. The crucible of the latter’s strength will be put to the test, especially so given the immediate 128^20-128^24 Hondo gap below. 4 additional bearish gaps remain open. (See Hondo chart with full download of StoMaster ®.) The case for a sudden and violent downspike is ever-present. PLEASE NOTE THAT THESE STO'S ARE DANGEROUSLY UNSTABLE IN THE MARKET'S CURRENT HIGHLY VOLATILE ATTITUDE. THE DOWNSIDE RISK IS ENORMOUS, GIVEN THE YAWNING GAPS BELOW.
Daily
The Daily executed an upcross on 11/10 in completion of its "picture perfect" bullish divergence at "A-B". Note that the Daily has hit its stride in its workout of that bullish divergence and handily exceeded its 129^00 objective. The ability of the Daily to withstand the downcycles of the Sixty and Hondo will determine the bent of the current rally. Thereafter, the onus of the bearishly positioned Weekly and Monthly will begin to weigh heavily. The .04 tic bearish gap between 128^20-128^24 remains open, as do 4 additional bearish gaps.
Weekly
The Weekly dominoed behind the Daily to a downcross on 10/08, punctuating the coup de grace of its upcycle endgame. That downcross was memorialized on 10/09 and now is official. This is the 8th week in a 12-16 week average Weekly downcycle.
Monthly
The Monthly finally MEMORIALIZED its 11/02 downcross on 11/30, thus putting paid the secular bull market begun 06/97. StoMaster’s objective for the bond was a minimum 125^00 by July-Sept ’98, a level exceeded on 08/21 with a high of 126^09. The high for the cycle was marked at 135^08.
To review, StoMaster opined in early 1997:
"As of 03/04, the extensive damage inflicted upon the Weekly and Monthly since 02/26 will require extensive reparation work before they are again in position for an upcross initiating their bull cycles. This reconstruction will most probably extend well into the next quarter, given the timorous tightening response of the FOMC on 03/25."
On 06/06/97, the Monthly repaired the remainder of the damage visited as above and UPCROSSED smartly. This constituted the 1st step in validating the secular turn in bonds to a long term (15 months) bull market. Confirmation would be finalized when the Monthly memorialized: to wit, it finished the month of June in the upcrossed position. (see Chart below or on .pdf or .evy download executable from home page for additional detail.) That watershed event occurred on 06/30/97 as the Monthly closed out June with a small positive spread K/D.
The bond market has signaled the end of the secular bull market begun 06/97 with 11/30/98's defining memorialized downcross of the Monthly Sto, which had initially downcrossed on an intra-month basis on 10/09/98. StoMaster had prognosed since 07/30/98, after the Weekly downcrossed momentarily and then recrossed to the upside, that bonds had entered into the final phase of the secular bull market begun 06/97.
Reviewing a little history, with the major Weekly upcross, which had occurred on 06/01's memorialization, StoMaster averred that:
"...we may expect 16 weeks of higher bids for the bonds, culminating in the Monthly objective of a minimum 125^00. The numerous and not imponderable, daunting gaps below in the Hondo and Daily graphs, will have to defer fills until the end of this bull cycle. The secular, long term profile is still uncompromisingly bullish as declaimed by the Monthly."In retrospect, the 10/01/98 call for the end of the secular bull market has proven accurate, given the 135^08 life of contract high achieved on 10/05/98.
 | Recommendations | |
Recapping general strategy, long/short positions may be initiated in the bonds only from oversold/overbought levels K/D, scaling in the bulk of purchases coincident with upcrosses/downcrosses in the Sixty, confirmed by an upcross/downcross in the Hondo.
Accumulation of the Oct '98 124 flex call (a "designer" option purchasable on the floor of the CBOT options pit) is the preferred trade for long term holding. (written a/o 03/03/98) Buying programs for the Oct124C flexes should be executed under 1^00. NOTE: ALL OCT 124 FLEX CALLS SHOULD HAVE BEEN SOLD OUT AT 2^00+ ON 08/21 AS BONDS TOUCHED 126^09. THIS SHOULD HAVE RESULTED IN A MINIMUM 100+% GAIN FOR THE 6 MONTH HOLDING PERIOD.
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