Traders are afraid to sell, or at least to be short the front end of the yield curve (twos and fives) going into a shortened session Friday and into a long holiday weekend. Too much can happen over the Memorial Day trading lull, and the prudent play is to either be flat or long June two-year (TUM2:CBOT) or five-year notes (FVM2:CBOT).

Still, you must look at the rally in short-term debt futures and wonder if the fear factor underpinning the flight-to-quality bid is sustainable. Consider where the fear is coming from. Terrorist alerts from Dick Cheney and New York City officials this week have made short-term Treasuries attractive.

But let's face it: the alerts are just the latest in a string of alerts that Wall Street has been all-too-cognizant of since Sept. 11. Sophisticated market players and institutions know another terrorist attack is likely and have priced much of that risk into positions. The alerts are not new information.

The nuclear states of India and Pakistan have escalated tensions over Kashmir and appear to be moving closer to an enlarged confrontation. While the saber-rattling does heighten global risk, both countries play a very small part in the world economy, despite their massive populations. A confrontation could have the market-positive effect of neutralizing the terrorist element in Pakistan either through international diplomacy or warfare.

Debt futures have also rallied on lower U.S. equity prices this week. But the upside symmetry in the June S&Ps (SPM2:CME) is still in place after the bullish

follow-through day on May 15.

In short, the fear factor may be overplayed and gives us a good reason to take the evening doji star pattern in the June five-year notes seriously. This candlestick pattern is a potent reversal signal, which sets up a good reward-to-risk trade with the risk or stop loss set above Wednesday's high. Confirmation of the pattern will come if the market quickly closes below the midpoint of Tuesday's bar, below 106-100. And the pattern is negated if the market continues gapping higher.

The two-year notes are exhibiting a similar topping pattern. The government will sell a record $27 billion in two-year notes next week, a factor that could weigh on both markets.

The June S&Ps (SPM2:CME), meanwhile, held the 50% retracement of their rally off the May 7 low. The pattern of a tail at a key retracement level should be familiar now, but notice that the level also coincides with the May 14 gap up, lending additional support. The

overbalance and follow-through day still give this market an upside slant. A break below 1071 is a signal that the uptrend since the May 7 bottom is in trouble.

Pork contracts are starting to look spent after healthy downhill slides. If a market gaps down after a pronounced down trend, that's often a signal that the trend is exhausted. August lean hogs (LHQ2:CME) gapped lower and closed down their daily limit on May 21. Then on the next day, Tuesday, hogs left a tail pattern that suggests they could attempt to fill the gap and test the high of May.

July sugar (SBN2:NYBOT) is poised to continue newfound momentum out of its pullback setup. The pullback has held at the confluence of the 38.2% and 61.8% Fibonacci retracements of recent swing points and provides a defined-risk entry.

The long trigger in such setups is the high of the low bar in the pullback. If sugar drops below the recent low and violates the Fibonacci cluster, that indicates the trade isn't working out and to take a loss.

Marc Dupee is an independent trader and co-author of the book

The Best: Conversations With Top Traders. Dupee was formerly markets analyst and futures editor for TradingMarkets Financial Group. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback to

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