2/01/11 – 8:15 – Yesterday the treasuries did what markets seem to always do following a Friday ‘flight to quality rally’; they gave back much of the gains. Not that I expected that to happen since based on how I look at markets, there was ample evidence that the rally would extend and to some extent I think there still is. But while the situation in Egypt, which sparked the rally on Friday, is anything but over, just why one would buy a long-dated treasury because of it might be the question traders and investors are asking themselves. At any rate, the 10-year traded below 120-23+ which was my ‘early warning’ signal that the rally may not unfold as expected but it held above my 15+ ‘stop’ level and I’m just not ready to give up on the prospects for further upside. It is dicey though and I’ll be approaching the long side with caution as I remain of the opinion that the big trade coming is the short that will come out of this now 6 week long correction.

When the treasuries made their lows on 12/16, there was good timing for a change of trend and I was expecting to see a low from which I thought a corrective rally would commence. That was based mostly on the fact that the decline that began last Fall looked incomplete using wave analysis. Today I think that the rallies are corrections not only because of what they did prior to 12/16 but also because of what they have done since 12/16. In my ‘Charts for the Day’ section below, I am going to post snapshots of the 4 charts I spend most of my time on since while they may not all look alike, they certainly all look corrective from a wave perspective. First though, I should point out that the oscillators all continued to hold their own higher through yesterday with only my Cycle Stochastic hitting overbought levels and there only barely. With the softening markets this morning, they are backing off a bit but again, not from what would typically be alarming levels. The daily Price Proxy remains in a buy mode so for the most part, if there is anything to be taken from the indicators it would be that not much has changed – about what I take from the wave structure. And then there’s volume which came in at a little better than 2/3rds of what we saw during the 2 rally days that finished off last week so there too, not much has changed. Everything still tells me we can push a little higher although one more day like yesterday and that might no longer be the case.

 
Other markets:  The Dollar had another in a string of ugly days and finished with an outside down day and it continues to deteriorate. I have to admit that based on what has happened since early this month, it appears to be headed lower even if that is in conflict with what I had been expecting. The long-term wave pattern looks friendly but the short-term action would have me out and scratching my head. Gold had another quiet day and it remains the only market that really has not moved much since the Egypt story broke on Friday which is odd since it is the first market that many would have thought would jump in response to any geopolitical unrest. The story for Crude Oil is quite a bit different as it experienced another very strong rally day, now having gained more than $7 from the lows made on Thursday. The big story for me though came from the CRB Index which of course was pulled along by Crude but what matters is that it traded as high as 342.03 and closed at 341.42 which is above the high end of my target range that I have held on to since late last summer. I can certainly be off by a fraction but the fact is that I see no good reason to think that it is not headed higher and very possibly much higher. If it fails soon I may have to say it was just an overshoot but the burden is now on the bears to turn it down, otherwise at least I will no longer be worried about the ‘D-word’ as in ‘deflation’. That leaves only the SPX which at the best levels yesterday had recovered just over 38% of the ground lost since the highs made on Thursday. I would still be defensive stocks at least until the SPX can clear 1292.

 
Charts for the Day:  I was about to post a very unique chart that I have built using some new tricks of my own that reveals some very interesting things about the rally in the 10’s but I’m going to save it for tomorrow and post 4 charts today. They are the daily chart of the 10-year futures, 10-year yields, 30-year futures and 30-year yields. All I am adding to them are lines over the recent highs and under the recent lows to give a general picture of what Elliott himself might use to describe a correction based on Elliott wave theory. I spend a lot of time looking at short-term patterns but sometimes just looking at the bigger picture can be very telling. In each market, except for the 30-year futures, I am using parallel lines to depict a trading channel but it is certainly possible that the rallies will not carry to the parallel. What is nearly impossible is to make a bullish count to the rally that began in mid-December. That’s not to say things can’t change to send the markets much higher but it is to say that wave theory will not be the tool to predict it.

Summary:  With the treasuries under pressure this morning my current friendly pattern based on the very short-term wave structure is in danger of breaking down. That is not to say the entire correction will then be over but with a longer-term negative bias, that thought remains in the back of my mind every time I see a rally fail. This is another one of those days when I have trouble with my sell stop based on the current market in relation to my supports. The 10’s are trading below support right at my 120-15+/19+ support and the next level that I see is at 120-04/06 which is minor but 119-28/01 is not and therein lies the problem. I can’t see selling below 04 with better support at 01 and below 119-28 is just too far away so I’ll bite the bullet and use 120-14+ as my sell-stop for today. I’d also sell against first resistance at 121-01. Hopefully tomorrow will allow for a little better risk control.

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