I Spy a Large Trading Opportunity–How You Can Too (Part 2)

06/17/2008 12:00 am EST


Timothy Morge

President, MarketGeometry.com

I truly have felt nearly alone decrying the threat of 20+ percent inflation over the past three to four years. But I believe others are now coming to the realization that the threat of massive inflation far outweighs any negative effects of soft or falling housing prices and bad loan portfolios. In my opinion, fighting inflation must be the first priority of the Federal Reserve and once the inflationary pressures are curbed, steady monetary policy must be pursued religiously. If this means a good number of loan portfolios get marked to zero, then so be it. If it means those that paid far too much with no down payments and borrowed money with 'interest only' mortgages on 'McMansions' will lose their homes and perhaps have to declare bankruptcy, then the sooner, the better. All wounds heal better when the medicine is administered sooner rather than later. Let's get on with the cure.

If you haven't guessed by now, I have a real opinion that there is a great deal of inflation in the United States, no matter what the 'massaged and manipulated' CPI and PPI numbers show. I believe we are experiencing at least 20 percent inflation on an annualized basis and that means the US bond market is headed in one direction: Down. The Chicago Board of Trade's bond future is currently trading around 112 ? and I expect that within 24 months, it will be well below 100. Now that I have revealed my opinion, remember that I gave a warning earlier that looking for a trade when you had an opinion was a two edged sword, so though I constantly monitor the bond futures market for an opportunity to get short, the trade set up and the risk reward and the stop loss must all be of the highest quality when I see what looks like an opportunity, because I know my opinion may be clouding my focus and skills.

Let's look at a recent bond futures chart:

Looking at the chart above, you can see that prices tried to climb above 117 14/32 many times but found rock solid resistance at the area. After trading a bit lower, prices climbed back higher and then formed an Energy Coil or classic trading range a bit below this area of resistance. Please note that I outlined the trading range and that eventually, price broke and closed above this area of congestion.

Price climbed higher and after three consecutive bars tested the 117 14/32 area again, bond futures prices began making lower highs and lower lows. At that point, I added a red down sloping Median Line and its Parallel Lines to show me the probable direction of price.

More in Part 3 tomorrow.

Tim Morge

  By clicking submit, you agree to our privacy policy & terms of service.

Related Articles on STOCKS