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The volatility in the U.S. Treasury markets heated up this week, as new contract highs were notched on Monday, followed by solid losses on Tuesday and Wednesday. However, price action Thursday morning found the bulls making a counter-attack and having success. Price action Thursday morning was scoring a bullish "outside day" up on the daily bar chart for March U.S. Treasury Bond futures--whereby the high was higher and the low was lower than the previous session's high and low, with higher prices on the day Thursday.

The market's action has made it fairly clear that this "wall of worry" will be tough to climb and unlike earlier in 2007, we might actually be headed for trouble. High energy prices, "agflation", a soft dollar, a weakening economy based upon the trembling merits of a housing recession (if not an outright housing depression) will all soon factor into a potential stagflation scenario. I personally am not calling for stagflation, but the ingredients are mixing and the path may have already been aligned.  

This is a trade on tomorrow's FOMC meeting. The overall market expects the Fed. to cut rates by .25 basis points tomorrow at 2:15 EST. Stocks and bonds have already priced this in. The key will be the guidance they give on future rate decisions. Frankly we expect that they will be forced to make some mention of a concern about inflation and if they do we should see Bonds pullback.

December U.S. Treasury bond futures on Wednesday rallied two a fresh two-week high as the bulls regained some fresh upside technical momentum. Price action Wednesday also challenged a downtrend line drawn off the September and October highs. A push and close solidly above that down-trend line, to negate it, would provide the bulls with better upside technical momentum. There is some solid technical resistance also located at the October high of 112 10/32.

Bonds have seen a tremendous rally in the last few weeks on the idea that the Fed would enter into a new rate cutting mode. We will find out on the 18th of September it that in fact is true. Either way we feel bonds have gotten ahead of themselves and should see a pull back even if the FOMC does in fact cut rates next week. Technically we have reached a multi year trend line resistance point as you can see on the chart below. A normal 50% Fibonacci retracement would push bonds back below 110 which is our max profit point.

September U.S. Treasury Bond futures on Friday hit a fresh six-week high of 108 22/32. Price action early this week has matched last Friday's high, but has so far been unable to push above that near-term technical resistance level. The bulls have gained upside technical momentum recently to suggest that a near-term market low is in place and that prices can continue to trend higher in the near term.

Here we are in another option expiration week. The major markets have broke through their respective old highs and are trading at or near record levels (except for the NASDAQ which has another 45% to reach its record highs, but is still trading at a six year high). Traders are trading with the bullish disposition that option expiration weeks typically show. But where will we fall at the end of the week? Although we would quit our day jobs if we knew the answer, we will do our best to at least give some thoughts on the forecast using open interest in the options market.

Has the market really made a double top or is corrective action taking place in typical summer doldrums fashion? It could be a little of both. First off, the summer months can be volatile. June has been one of those volatile months. Daily trading ranges have been above the last 15 year’s average (see chart below). However, a typical summer can be summed up by the summer doldrums. That means weak or sideways markets. We have had a little of both this month as the markets have been volatile defined by the larger than average daily trading ranges, but we have been stuck in a trading range between 1490 and 1540 in the S&P cash market.