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August 24, 2005

As it has been over two months since my last newsletter, I'll start with a quick review of some previously held opinions:
Corn and Soybeans - Turned into an incredibly volatile affair, with both markets now being back below where they were when I first recommended them on June 3rd. I am standing aside in both of those markets.
In mid-March I began to recommend buying the U.S. Dollar Index looking for a move up at least up to the 91-92 area. With the Dollar recently trading within a few ticks of 91, I am now taking a fresh look at the currencies and am on the sidelines in the Dollar Index.
Sell Copper
I have been recommending a short position in copper since April 12th, with my most recent recommendation coming in our June 14th newsletter....and I have been dead wrong. Even so, I still believe this is a potentially big trade and intend to stay with the idea. As I have pointed out in previous newsletters, when copper tops out, it tends to do so with fairly dramatic drops, some examples of which I'll list here:
                                        Major Tops in Copper Last 30 Years

Contract Month

Total Price Drop

Time Frame

Price Movement

July 1974

55 cents

2 months

$1.35 down to $.80

July 1980

60 cents

2 months

$1.50 down to $.90

March 1988

40 cents

1 month

$1.30 down to $.90

July 1989

36 cents

2 months

$1.38 down to $1.02

July 1996

40 cents

6 weeks

$1.30 down to $.90

If you want to see charts of those moves go to .
As I've said before, picking tops can be a tough endeavor. Aside from the fact tops can be quite volatile/nerveracking, they are also usually accompanied by highly emotional market rhetoric that suggests you are crazy to be selling instead of buying....Here are some quotes off my newswires on the day copper made a new all time high last week:
"Copper futures roared to record levels a buying frenzy driven by bullish fundamentals and a chart that offers no natural resistance." 
"It's extremely bullish....It's all just positive, positive, positive."
"If you look at the charts, either you're long (a buyer), or you don't trade."
"If you are going to trade this, you still have to buy it at $1.75. People who need it have to buy it."
"There's no technical resistance on the chart anymore..."
Back in June I said that if copper did get up to $1.70-$1.75, what I didn't want to do was get scared and give up on the idea (which I almost did)....that I would continue to be short through buying puts and selling futures on the December contract.....I may still be wrong on this, but it is just very difficult for me to imagine it being January 1, 2006 and for Copper to STILL be at $1.70. SOMEWHERE, the plug gets pulled and all of a sudden traders are looking at the market thinking, "Why in the hell didn't I just buy some puts when it was up there in the thin air?". And that is what I absolutely recommend.....Buy some December puts and see what happens....If history is any guide, I believe there is a 40 or 50 or 60 cent "evaporation" coming soon (or NOW) in this market and I intend to be there....
Buy Treasury Bonds
There still seems to be this universally held opinion that long term interest rates HAVE to go up, and with it, Treasury Bond prices have to go down. I still firmly disagree with this idea...I think the Bond market is going a LOT higher and long term interest rates are going a lot lower....If you want a lengthy discussion of why I believe long rates will continue to drop, see my newsletters from earlier this year at:
The bottom line for my bullish opinion, however, is summed up in this excerpt from the Jan. 5th newsletter: 
"Very briefly, I think the analytic community can talk up the idea of a decline in Bond prices (and rise in long term yields) all they want, but the simple fact is people who actually own Bonds are not really interested in selling them. My mother, for example, owns Treasuries  bought maybe 8-10 years ago paying about 7.5% a year that still have 15 years to go. If she sells them, what does she do with the money to replace that income?....As I have said for some time now, I believe the demographics of the Baby Boom (approaching retirement) mean that more and more of retirement accounts will be selecting fixed income investments (however "low" might be the perception of yield), which means a steady influx of buyers somewhat similar to what the Stock Market experienced in the 1990's. When you actually buy a 20 year instrument, this is generally not a short term trade, i.e., not something you are going to sell in one or two years....This may be simplistic, but in the real world ( as opposed to the analytic community), I think the equation of no actual sellers and a steady influx of new buyers argues for Bond prices to go higher, and long rates lower, for some time to come."
Those sentiments, however, are really just relevant to the long term picture, and may or may not be important to you or me as a trader at this specific moment in time....but here are the facts; During 9 of the last 10 years, from now until year end, WHATEVER was going on in the economic world, Treasury Bonds have had a decided tendency to go up. I have long been aware of this and have an opinion as to why it is true (call me if want to hear it) but, to me, why is not so important as the fact of what "usually" happens in Treasuries over the next four months.
I've put this in both table and chart form and you can see for yourself.....
The table below notes where December Bonds were on August 27th, then what their highest (or lowest) trade was before that contract expired, as well as when that trade occurred, how big the move was, and finally, what it meant in terms of one futures contract. If this table makes glaze over, the most pertinent column is "Change from Aug. 27 close" where you can easily pick up on the tendency for Bonds to be going up from now to year's end.



Highest High

Or Lowest Low


Change from

Aug. 27 close

Dollars per futures contract


110 05/32

114 22/32


Up 4 17/32



104 29/32

112 08/32


Up 7 11/32



107 29/32

115 04/32


Up 7 07/32



114 01/32

112 18/32


Up 8 17/32



99 29/32

105 06/32


Up 5 09/32



95 21/32

90 23/32


Dn 4 30/32



105 01/32

112 18/32


Up 7 16/32



93 15/32

101 02/32


Up 7 19/32



90 08/32

97 09/32


Up 7 01/32



93 10/32

101 07/32


Up 7 29/32


This is not to imply you can just buy Treasury Bonds right now and be guaranteed you'll make money, just that they tend to be stronger rather than weaker in most years....Here is what all those years looked like on the charts....


Here is the current December Treasury Bond contract.....I am buying it, looking for, initially, 7 to 8 points on the upside....
I think both of these ideas need to be moved on immediately....
I strongly believe last week's action in Copper could easily have been the "blow off" and, if correct, it would not be uncommon to suddenly be 10-15 cents off the highs.....
In Bonds, I see the low of several weeks ago as the end of a normal correction and believe Bonds have now entered their typical year end upswing...
Give me a call...
Bill Rhyne
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