A Multi-Market View

12/01/2006 12:00 am EST

Focus:

John Bollinger

President and Founder, Bollinger Capital Management

Trading expert John Bollinger keeps a sharp eye on each segment of the economy. In the latest issue of his Capital Growth Letter, he gives his subscribers an overview of the stock, bond, and oil sectors …

“World stock markets continue to rise in rather a monotonic manner, with some variation, but the trend is pretty broad and stable. Many markets, like Canada and Taiwan, are hard up against the old highs, while some like Mexico and Hong Kong are trading well into new high territory. We take this as a positive trend overall within which setbacks can be used as reentry or add-to points. We'll get more cautious if we see some technical deterioration, but for now the global stock outlook seems strong.

“It is very interesting how little bearishness there is on bonds, while the real story is one a stealth bear market. A regression line fitted to the 10-year Treasury note yield is rising at .25% per year. That may not sound like much, but we are entering our fourth year since the low, when 10-year Tnotes traded near 3%. Since the summer of 2003, the trading pattern has been a steady series of higher highs and higher lows. Yet, no one seems to be paying attention. Fitting the channel so that the line tags the initial highs and lows, a bandwidth of 2.8 times the standard error, the lower limit is 3.95, which would be a higher low, and the upper limit is 5.0, which would be a new high. What is happening is at odds with perceptions, as is the case at present.

“A while back we opined that a trading range would develop for crude oil in the $40, $60 area and so it did, for a while. It now looks like a new trading range is developing atop the old. The numbers seem to be in the range of $55, $75, suggesting a straight-forward strategy: Buy energy-related stocks near the bottom of the range and sell 'em near the top. This strikes me as perfect territory for both traditional technical analysis, in the pattern recognition sense, and for newer techniques, like buying tags of the lower Bollinger Band when volume accumulation work confirms. We really like using Bollinger Bands to diagnose classic chart formations like double bottoms. We require the first low to be outside of the lower Bollinger Band, the second low to be inside that same band. To take action we require conformation from a sign of strength, a day with greater than average gain, range, and volume. %b is quite useful in this pattern recognition technique.”

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