Can Notes Hold On?
Fundamentals
T-Note futures have come off recent highs due to some stability in Europe and renewed optimism in the US economy. Treasuries, however, have not completely lost favor with investors, as market jitters remain. Profit-taking has accounted for some of the pullback in prices. The upside potential for the Note market has improved, as the European crisis may delay any rise in interest rates by the Fed, suggesting yields can be pushed lower. The market may not be seeing the fear-trade buying that caused the price of the 10-year Note to jump 6 points in just under two months time, but the potential of a strong recovery in the US has been met with heavy skepticism. The current administration in Washington has curbed the pace of borrowing, at least for the time being, which could aid prices due to a cutback in supply. The possibility that China's robust economic growth will slow could also act as a crutch for the treasury market due to lack of opportunities in equities and commodities. Renewed optimism in the US economy and some semblance of stability in the Eurozone, however, could cool off demand for treasuries. Investment in Gold has also picked up recently, which could steal some of the Note market's thunder. If the US Dollar pulls back, it could fuel further demand for Gold at the expense of US debt.
Trading Ideas
The technical outlook for the T-Note market remains solid. Uncertainty has taken hold recently, which has had traders on the defensive. The technical outlook is unclear at the moment. It does not appear that the technicals favor technical buying, but the market has held near-term support levels to stave-off selling pressure. For this reason, some traders may wish to be patient and wait for a close below 121-16 before entering a short futures position in the September 10-year Note, with a protective stop at 122-00 and a downside objective of 117-00. The trade risks roughly $1,500 for a potential profit of $3,000.
Technicals
Turning to the September 10-Year Note chart, we see the market pulling back after forming a tombstone doji. Prices pulled back sharply, but were unable to strongly close below the 20-day moving average, which could have been seen as bearish in the near-term. Tuesday's spinning top indicates the market could bounce in the near-term. This conflicts with the momentum indicator, which has turned sharply lower, hinting at further selling pressure. Support near 120-00 and the 20-day moving average could be a gauge of near-term direction. So far, the market has held these two levels, but a close below 120-00 could trigger technical selling and shake-out some longs.
Robert Kurzatkowski Trading Specialist
