U.S. Two-Year Treasury Futures to Rally: Technical Analysis

By Wes Goodman

Jan. 6 (Bloomberg) -- Treasury two-year futures contracts are poised to rally in January as their slide to their worst month on record in December is likely to reverse, said DZ Bank AG, citing trading patterns.

The contract had a so-called bullish engulfing day on Jan. 4, said Andy Cossor, the Hong Kong-based chief market strategist for Asia for Frankfurt-based DZ Bank, Germany’s fifth-largest lender. The pattern occurs on a candlestick chart when a small solid box, which is created by a decline in price, is followed the next day by a large empty box, reflecting a gain. The second candlestick is bigger than, or “engulfs,” the first one.

Using the same chart, Cossor, drew a descending line connecting the highs of Dec. 18 and Dec. 31 and extrapolated it to today. The contract is above the line now, a second positive sign.

“The bullish engulfing day is normally a reversal pattern,” Cossor said. “The downtrend should stop and there should be further upside price action. The rally also broke above the downtrend line. The two things together make a bullish move in the market that much more likely.”

Two-year futures contracts for March delivery were little changed today at 108 11/32 as of 10:10 a.m. in Hong Kong. They climbed 9/32, or $2.81 per $1,000 face amount, in the past two days, the biggest gain in four weeks.

The contract fell 26/32 in December, the most since it began trading on Jan. 2, 2009.

In technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.