Eurodollars: Waiting for trap door to fall open

October 31, 2014 09:56 AM
Spooky bearish engulfing pattern

Eurodollar futures(CME:EDZ4) are lower today with the yield curve steepening throughout the first three years. Volume has been moderate with the majority of positioning being initiated by the shorts. The technical conditions continue to deteriorate and the risk for a precipitous fall (though not likely today) has increased. The lack of any sustained recovery of the mid-October spike signals it out as a major top. Thus far the movement away from that top has been gradual, but that is not expected to last should the series of economic reports continue to point toward economic growth above the 2.25% trend.

Candlestick Technical Analysis – EDZ6:

EDZ6(CME:EDZ6) advanced 20 bps from open to close on Oct. 15. This was the biggest open to close advance since Oct. 18, 2013. As big an advance as was that 20 basis points jump, the difference between the high and the close was even greater at 22 basis points. We call this the ‘upper shadow’ and when there is a long upper shadow, we question the conviction of the bullish contingency; why had they been willing to relinquish all that gained ground? There had never, in the last few years at least, been such a dramatic reversal from high to the sessions ‘body’.

The two-sessions Oct. 15-16 period formed a bearish Harami which had been confirmed by the subsequent price action on Oct. 17. Additionally, the settlement on the 17th fell below the ‘mid’ of the 15th, further confirming the bearish reverse.

More recently, on Wednesday EDZ6 settled below the opening of Oct. 15. Yesterday’s advance against that fall, ahem, fell short of the ‘mid’ and has since been followed by a return toward Wednesday’s low. Price action over the Thursday/Friday period may create a bearish engulfing should EDZ6 settle 99.17 or lower today.

The bullish advance originating in early October predicted here following the bullish bottoming of the ‘double doji’ on Sept. 18-19 will attract price action going forward. Between the current level of 98.16 and 97.90, there could be a more dramatic single session 15-basis-point decline that accompanies a data event. Once toward 97.75-97.90, price action should consolidate for some time until economic strength points to GDP growth well in excess of 3%.


About the Author

Martin McGuire, managing director at TJM Institutional Services