Thursday, October 1, 2015

EDZ6; T-line Resistance and Bear Reverse Call

Candlestick Technical Analysis: EDZ6 (December 2016 Eurodollar Future)

Red December 2016 Eurodollar trades flat on the day following the Jobless Claims data.  Price action was muted yesterday which is consistent with pre-employment report trade.  Open interest rose modestly across the Eurodollar curve (+18K) but was slightly lower for EDZ6 (-2k).  The yield curve flattened with the first three years falling 1.5 bps and the last three years rising 1 bp.      

Candlestick price action in the last two sessions suggests a possible reverse with a ‘bearish Harami’ as price reached to the top of an upward sloping channel that has corralled trade since early-June.  The bearish Harami or ‘pregnant line’ suggests the trend, like an expecting mother, does not run at top speed (can be overtaken).  Additionally and apart from its relationship with Tuesday’s price action, Wednesday’s price action by itself formed a bearish ‘hanging man’, a candlestick pattern name which does not require much imagination to guess its implications.

Noted earlier was the bullish trend in EDZ6 that has advanced by 65 bps since early-June.  This is a fairly impressive move that has evolved with a number of mild intermediate reverses.  The impressive breakthrough on the August 24th global equity unrest and flight to quality session helps to define this bullish trend with its close at the top trend line.  We would expect that bullish participants would need rather strong confidence in order to initiate additional long positions at the trend extreme in a bullish trend that includes the pricing of China’s economic slowdown.  More likely, we might expect the marginal long to exit positions. 

There have been 9 new session highs without a three session pause since September 10th.  This indicates modest overbought conditions.  Finally, price action from today and yesterday, as it currently stands, can be viewed as ‘two black crows’, an additional bearish candlestick pattern. 

Bullish participants with positions in EDZ6 in front of a confirmation of the bearish implications of the candlestick patterns discussed above and in part relying on resistance from the top of an intermediate term bullish trend might consider reducing or removing the position.  Better positioning levels would exist on either a breakthrough of resistance or on a substantial pull back. 

Conversely, interested shorts could consider waiting for confirmation of the bearish implications of the ‘hanging man’ and the ‘bearish Harami’ or they could position here and risk a break of trend line resistance and take appropriate risk reducing efforts thereafter.  For shorts, a pull back to the lower trend line support at 98.81 would be an appropriate objective.      

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