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4/30/10 – 8:15 – Not a lot of price movement but friendly none the less. In the first hour yesterday, the cash 10’s softened, perfectly filling the gap they left on Tuesday, before improving for the remainder of the day. Everything still looks positive for higher prices but nothing has changed to make the wave structure look any more impulsive. I do see some timing for a change of trend on Tuesday but it doesn’t indicate that we will see a major turn and it’s still too soon to expect this presumed A-wave to finish so we’ll just have to see what if anything, happens. The thing that I keep coming back to is the collective amount of resistance that had developed in the 10’s between the low 3.70’s and the mid 3.50’s, and how it keeps impacting the rally. That relatively tight range included retracements of several different degrees, gaps, trend-lines and swing lows. Each time the treasuries have probed into the resistance, while they may have gotten rejected, they’ve recovered quickly. It’s as if they are eating away at it piece by piece and while significant levels remain ahead, I can’t help but wonder where they might be if the resistance hadn’t been so heavy. A few more pull-backs and up-thrusts and there won’t be any left. The wave theory compels me to believe that this rally is destined to fail but if the buyers keep showing up on the pull-backs, there may not be enough resistance left to fend them off. Aside from my belief in the validity of the wave theory, I have also come to believe that support and resistance, if correctly identified, will take its’ toll on a market and if the 10’s can continue to clear what lies ahead, then they have more internal strength than what the wave theory is suggesting. So far, the treasuries are acting exactly as they should if they are in a B-wave but I will continue to watch the remaining areas closely as if they continue to be tested, it will be important to watch how the market reacts to them. This has been a quiet week so far as scheduled economic news goes but this morning, Advance GDP numbers will be released and they could certainly bring more volatility into the markets. Another reason to feel good about at least the near-term prospects for higher prices is the fact that yesterday the treasuries did better despite the fact that stocks had a very strong showing. As you know if you’ve read the updates the last 2 days, I didn’t expect to see the equities reach the levels that they’ve now reached and that leaves me uncertain about the future of that market. The only way that wave theory would allow for new highs following a 5-wave decline – and this was as perfect a 5-wave decline as you will find – is if it were a C-wave and while the overall price action since the 15th can be interpreted as an ABC, the wave structure of the first decline makes that count difficult to embrace. Given how close the Dow and SPX have come to those 62% retracement targets I mentioned on Wednesday, there just isn’t a lot of room for them to make new highs without looking as though they will just keep right on going. I continue to be reminded of a high in stocks due around 5/14 but if they do continue higher, I will have to do more work to come up with my next series of targets. The dollar index is becoming overbought on a daily chart and has been that way, with bearish divergences, on a weekly chart for some time now. I mentioned some serious levels above that would be very meaningful if violated but I’m beginning to think that a pretty good correction may be in the cards prior to any breach of those levels. The dollar has been in a strong rally this entire year and news like the downgrading of the sovereign debt of several European countries may be just what is needed to put a cap on the move near-term. Remember, ‘buy the rumor, sell the fact’. That isn’t a prediction but rather an acknowledgement that nothing goes one way for too long. Nothing, that is, but stocks. It’s fair to anticipate increased volatility today with the GDP news coming and if we do get any real movement in treasury prices, I’ll try to post a chart with my latest wave interpretations on Monday. There is decent support in the 10’s right around 117 but the only really good support is closer to 116-08. Absent a real meltdown today, the treasuries aren’t likely to do anything that would destroy my preferred count. I would still be a seller on a spike into any new areas of ‘intermediate resistance’ that are identified below. One non-wave related thing I would be aware of is that if the 10’s were to close through a 3.593, that would produce an outside reversal towards lower yields on a monthly chart and at the very least, that would be a close that I would not want to fight with any short exposure. The 30-year equivalent is much closer at 4.537. With so little new to deal with in the treasury markets, I thought I would post another chart of the stocks revealing what is causing me problems with the wave structure. The 2 basic types of corrections, excluding triangles, are ‘flats’ and ‘zigzags’. ‘Flats’ are sideways corrections where, in a rallying market, the B-wave basically goes back to the previous high before the C-wave returns to where the A-wave had ended. It is a simple sideways trading range. ‘Zigzags’ are not sideways moves at all as once the A-wave completes, the B-wave rally corrects about half of the initial break before the C-wave pushes to clear new lows of the correction. The other difference is that the A-wave of a ‘flat’ is a 3-wave move while the A-wave of a ‘zigzag’ is a 5-wave move. If you recall, that is the very reason I feel that the 10’s are in a flat correction – no 5-wave A-wave. Anyway, look for yourself at the chart of the SPX. The decline from the high on the 15th was a 5 and yet they made new highs out of it. Now we have a second 5-wave break and here we are again, knocking on the door to new highs. I know wave theory can’t always be right but when counts look as clean as these, it is disappointing when things don’t turn out the way you expect. 4/29/10 – 8:15 – As of Monday, my preferred count for the 10’s and 30’s placed them in the A-wave of an ABC flat correction of the move up in rates that began in October. That is still the way they look to me. Following the break in stocks on Tuesday, my preferred count there had the SPX breaking down from a 5th wave high, the degree of which I don’t yet know, and impulsing into a low that now likely represents the bottom of at least the A-wave of an ABC zigzag correction, still needing another hard break like what we saw yesterday to complete. A more bearish picture can develop in stocks but the next break to the downside should come in any scenario so for now, it doesn’t matter much whether I label Tuesday’s break as an A-wave, or as the alternative, the 1st wave of a much larger decline. The next break figures to be about the same regardless of the count. Yesterday was the FOMC meeting so after some early fireworks, the markets all settled down and awaited the Fed news but it barely had an impact on either market. The most likely thing that treasuries could do to cause me to change my preferred count would be to break sharply to the upside in price – and right away - which could allow for a more friendly interpretation of the sloppy wave structure that developed over the course of the past several weeks. The fact that they had spent all day yesterday trading lower had already made that count seem more unlikely and without any help from the Fed news, I see no reason to alter my thinking now. For all the reasons I laid out in Monday’s update, I am calling this rally just the A-wave of what is likely to be an eventual sideways correction that could persist for months. If we are in fact in the early stages of a flat correction, then the waves could get pretty difficult to read. Wave theory makes it clear that the structure of an A-wave of a flat is anything but clear. They figure to be choppy from start to finish and while my most effective tool may to correctly identify support and resistance levels, if there were ever a place to keep an eye on the more traditional technical indicators, this could be it. So with that in mind, let’s take a look. Volume in the 10’s on Tuesday’s breakout was nearly twice that of the daily average which was great news for the bulls but it wasn’t all that much lower yesterday when they gave back more than half the gains so for now, that’s a wash - with a friendly bias. Meanwhile, open interest has been expanding since March in both the up-swings and the down-swings so that too is pretty much a wash but again, since the trend has been generally up, with a friendly bias. Daily stochastics are more negative than positive as they have been bearishly diverging from overbought territory since 4/15. The RSI has a similar divergence though not from overbought territory. The 10’s are above a cluster of fairly long moving averages that I look at but all are between 116-06 and 116-18+ so that can change pretty quickly. Everything is telling me the same thing – which is not much. The input that I see from these indicators is about what one might expect to see in the A-wave of a flat. This figures to be choppy no matter how you cut it and nothing is likely to change for a while since if we are in a correction, then the B-wave that follows should have very similar characteristics. As far as stocks go, from here I expect to see at best, several days of an upward correction to be followed by another hard break. Targets for the S&P futures, which closed around 1188.50, begin at 1192.5 and end at 1201.50. To be sure, this market has fooled many a bear over the course of the last year and it can do it again but for now, I will expect to see a secondary break in the next few days. With news of downgrades to the sovereign debt of Greece, Portugal and now Spain and some think Italy will be next, the dollar has moved sharply higher and is approaching the 62% correction of the entire decline from the March 2009 top to the December 2009 bottom. The index closed at 82.32 yesterday while the 62% number is at 83.72. Perhaps more importantly, a trend-line drawn off the extreme peak in February of 2002 has a current value of 84.61. That would be a huge number to take out. I touched on this Monday and I’ll repeat it here. The move out of October took 27 weeks and while nothing tells me how long this presumed correction will last, it is certainly should be longer than just a few weeks. I suspect that the A-wave is not yet over and that we will still see higher prices still, but not that much higher. For now I doubt that the 10’s break below 3.53 and the road from here to there can be very bumpy. Even a move back into the lower 116’s wouldn’t mean that the A-wave has completed. This figures to continue to be a challenge going forward. I should point out that when I look at a weekly chart of either 10 or 30-year yields, both seem to suggest that the most likely wave pattern would have us heading back to the October yield trough. Only upon closer examination using daily charts does the wave structure of the move out of October open the door for a shallower correction and currently, the intra-day analysis of the move out of the April yield crest suggests that is the better count. Could it be that I am not seeing the forest for the trees? Perhaps, but until I see some wave based evidence to the contrary, I’ll stick with the notion that we are in for a 2-sided market with an upward bias for the foreseeable future. For now, with a gap just below yesterday’s close and good support from there down though the entire 116 handle, I would expect to see the 10’s turn back up in the next day or so – perhaps consistent with a break in stocks. For the day, I am using that gap as my risk control area for any longs even if it doesn’t have much in the way of pattern significance. 4/28/10 – 8:15 – The early bid in the treasuries yesterday was helped along by a hard, mid-day break in the equity markets brought on downgrades of the sovereign debt of both Greece and Portugal – Greece’s dropping 2 notches to junk. The resulting rally in treasuries produced new highs of the move across the curve. As the 10’s push higher, they continue to eat away at the many resistance levels that I had highlighted in previous updates. The gap left on 3/24 was filled in the cash 10’s – it had been filled in futures several days ago. The trend-line drawn up from the all-time yield trough in December of 2008 was also breached as were both of the trend-lines that had defined the triangle that completed on 3/18. What’s left that’s within striking distance over the near-term is the 38% retracement of the move up in yields from 3.10 which is at 3.667, followed by what Elliott would call ‘the 4th wave of a lesser degree’ which in this instance is the point at which the triangle ended – 3.619. Beyond there is simple price support at 3.585 and then a tight range of levels that include the 50% retracement of the move from 3.10, at 3.560, the 23.6% retracement of the entire move up in yields from December of 2008 at 3.548 and the February swing yield low at 3.537. Much beyond there and I would really want to re-think the notion put forth Monday and again yesterday that this rally is likely just the A-wave of a correction of the October through April move but I’m not there yet since the wave structure hasn’t really changed. I was looking for higher prices so at this point, it doesn’t really matter which friendly count is unfolding but that statement may not be true if the rally extends much beyond 3.53. Actually, there is still a way that the move down from the April yield crest can turn into a 5-wave move which would open the door once again to a move back to 3.10. It would require an absolute price explosion right now whereby all of the above mentioned yield supports were taken out in the next few trading sessions. That would give the move that began 3 days ago the look of a 3rd wave forcing a count that would label the action from 4/13 through 4/23 as a very bullish, irregular correction. If we have to go there, I will show that count in a chart but for now, let’s just wait and see how the 10’s react to the next layers of yield support should they be encountered. And while I’m at it, there is a really intriguing level ahead in the cash 30-year. The low yield on 2/05 is 4.486, which stands as the lowest yield seen since an upside gap on 12/21/2009. That makes that level both an obvious support point based on that swing low as well as the fact that it also represents the top of that older gap. Additionally, if you look at the Fibonacci retracements of the move from the October yield trough in the 30’s at 3.888 to the yield crest on 4/07l at 4.858, the 38% retracement is at 4.487. Even the 200-day moving average is nearby at 4.455 and rising. The bottom line is that while treasuries should still do better, none of the above mentioned yield supports should be taken lightly. From current levels, the 10-year would need to break nearly a point to confirm what I already believe – namely that the entire rally that began on 4/05 is a simple A-wave of a bigger ABC correction. I would still be a seller against the upcoming resistance that I’ve highlighted above but only with stops just above each. I don’t like the idea of getting long at these levels as if my analysis is incorrect and this is just the beginning of a bigger move, there should be ample time to take advantage. The one scenario I mentioned that would have a price explosion pending would be a hard thing to bet on but to be sure, it is something to protect against should one choose to get short. USE STOPS! I’ve said it before and I’ll say it again, the one thing that can bring about the most bullish of scenarios in treasuries, is the equity market. The real reason for the explosion yesterday in treasury prices was the collapse in equities. In the big scheme of things, the break may not seem that it was all that meaningful but in a market that has come this far with few real corrections, any break must be respected and this one has all the look of the beginning of something potentially much bigger. For starters, I have often mentioned 1228 as the last obvious objective in the SPX and that notion was based on a simple Fibonacci 61.8% retracement of the bear market. At Monday’s highs, 1219.80, the SPX had retraced 60.82%. If that’s not close enough for you, then consider that with the 11,258 print on Monday, the Dow retraced 61.96% of the bear! You won’t find many examples of Fibonacci retracements of large moves that come closer than that and we already have an outside bar on the weekly charts. I have included an hourly chart of the S&P futures on which I have labeled what may very well have been a wedge into the highs. Elliott theory states one of only two possible placements for a wedge is in a 5th wave and that they occur in markets that have gone too far, too fast. Those words come from Elliott, not me. Additionally, I have labeled the decline and as of the close yesterday, this one looks as impulsive as any example you can find in a book on wave theory. That’s not to say it has ended and I may need to re-label it if and when new lows are made but should we begin to rally, I will post objectives as they could offer up a great selling opportunity. For now, they begin at 1195, the current ‘4th wave of a lesser degree’. 4/27/10 – 8:15 – I’m going to keep today’s report short and to the point. Yesterday, the 10-year futures recovered about 45% of the ground lost since Thursday – about 60% in the 30’s – before turning back down in the afternoon. With no solid evidence that they couldn’t still trader lower - or higher - in the near-term, I came out of yesterday without much of a bias. The steepness of the initial break from the highs made a secondary decline seem likely but as outlined in yesterday’s update, in my preferred wave count, timing alone suggests that even the first phase of the corrective rally should last quite a bit longer than it has. With that thought fresh in my mind, seeing that a nice bid has developed overnight isn’t all that surprising. When I stay focused on the bigger picture wave count, I still can’t find a reason to stray from the conclusions drawn in yesterday’s update – mainly that the rally off of 4.01 was likely only the initial leg of a ‘flat’ correction and just as likely, only part of that initial leg. Trades much above 116-28 in the 10’s would suggest that a secondary decline over the near-term may not be in the stars. Should we reverse this morning from near 116-28 and penetrate yesterday’s lows, I’ll look for break into the 115-22/24 area in the 10’s with a potential abbreviated target near 116-04. For now though, that’s about as far as I would expect to see this decline carry. We would have to trade well through 115-20 in impulsive looking fashion to force me to re-evaluate but unless and until that happens, I’ll stick with the wave count that suggests that the next several weeks and even months may well be characterized by a range-bound market, the upper boundary (yields) of which will be about 4% with the lower boundary likely to be no better than 3.55. I’m not including a chart today as there are just not enough new features to highlight. For the day, I’ll use 117-01 as an indication that we will push to new highs very soon while a break below 116-15 would suggest a secondary decline is developing. 4/26/10 – 8:15 – The reversal on Thursday from a trend-line, the middle of a gap, a wave equality target and a Fibonacci retracement level was bad enough and then came Friday’s weak opening leaving what could prove to be a ‘breakaway gap’ to deal with (see chart below). Couple that with the fact that the longer-term wave count remains bearish for bond prices and we’re left with a market that at the very least, demands respect from Thursday’s downside reversal. So against that seemingly bleak backdrop, let me point out why I don’t think that we are about to impulse up above 4% - at least not right now. The fact is that once the 10’s touched that 4.01 target, the same yield that stopped the move back in June, there were 3 equally likely wave based scenarios in my opinion. The least friendly near-term count, I’ll call this one scenario #1, would have the move out of the triangle from 3.619 to 4.01, labeled wave-1 of a larger impulse up in yields. In that count, I would have expected to see a correction of about 38-62% of the yield rally before it would resume. Scenario #2 would label the 4.01 print, the end of an impulse that began at the 3.10 yield trough in October and in that count, we could expect to see a similar % correction of the larger move from 3.10 to 4.01. Finally, scenario #3 would have the 4.01 print in early April labeled a B-wave which would be followed by a 5-wave move all the way back to 3.10. So which seems the most likely now? At the low yield on Thursday, the cash 10’s had retraced exactly 76.4% of the move up in yields from the triangle ending yield trough of 3.619 on 3/18. The bad news is that 76.4% happens to be a Fibonacci retracement right down to the last decimal (it’s the reciprocal of .618-.382). It plots on all of my charts when I look at retracements but I typically don’t pay it much mind. That is because once an impulse is retraced by more than 62%, I’m prepared for a total retracement. In this particular case, that minor Fib. retracement level was just one of many reasons to know there was strong yield support in that area - and not even one of the best reasons. The point is that while the 10’s may have hit good yield support, they had already retraced so much of the yield rally from 3/18 as to suggest a complete retracement was in the cards. If that were the only reason I had to go on, I would be more concerned but there is another reason to think that Thursday was not the end of a correction. This one is based on wave theory and it says that all corrections should end with 5-wave C-waves - and this one did not. So now there are 2 reasons to believe that scenario #1 may not be the best count. What about scenario #2? That one would have us correcting the move from 3.10 to 4.01. In that scenario, the range of targets I showed on a chart last week, including the area that held on Thursday, all make sense. The thing about that count is that the move up in yields from last October lasted 27 weeks and so far this ‘correction’ has lasted just 2; not nearly enough time for a correction of that magnitude. So if scenario #2 is to play out, then we can deduce that what we have seen is only part of that correction, namely just the A-wave and perhaps just part of the A-wave. And that’s not all we can deduce. Since the move out of the April yield crest appears not to be a 5-wave move, then not only is it likely to be an A-wave, it would be the A-wave of a flat correction. That means that once it is completed, the 10’s should go back and test 4.01 again and again they should hold. From there, we can expect another rally to develop, the C-wave, with targets back at Thursday’s best levels or beyond if the A-wave has not yet completed. Finally, there is scenario #3. As mentioned above, the rally from the 4/05 yield crest does not appear to be a 5-wave move and 5-wave rallies are a must if this were to be a C-wave so right now, that count is not looking very good. So using wave theory, the process of elimination and some deductive reasoning, it seems like we can zero in on a preferred count – at least for now. That preferred count would suggest that we are correcting the move up in yields from the October yield trough of 3.10 to the April yield crest of 4.01, with best targets having been posted in chart form last week but in case you missed them, they range from Thursday’s best levels, to about 3.56. At this point, we are likely only in the A-wave of that correction and once it has ended, if it hasn’t already, we can expect to see a B-wave take us back to near 4.01 before an eventual C-wave carries the 10’s back through the range one more time. Only then could we expect the bigger bear market to take hold once again. This count, like the others, can change but wave work is all about having preferred counts and backups and right now, that seems to be the obvious preferred one. We’ll see how long it will hold up. Looking at the stock market charts over the weekend, I was reminded how it wasn’t very long ago that I mentioned 1228 as about the only obvious objective left in the SPX but at the time, it seemed far, far away. Friday’s range in the SPX was about 12 points, less than the distance from the close, to 1228. Beyond there and who’s to say we can’t go back to the top? There are many ways to technically analyze markets and certainly you could find as many technicians who are currently bullish stocks based at least in part on the strong trend, as there are those who are bearish based on stocks being overbought. Both are certainly true as the trend is clearly up and most any technical oscillator would show them as being overbought in almost any time frame. Joe Granville used to talk about stocks ‘climbing a wall of worry’ and that is something they’ve been doing for more than a year now. I view that market as prime for a break but I have felt that way before so until I find some compelling new target, or compelling new timing inflection point or an as yet unfound wave pattern that makes sense to me, I’ll just wait for an impulse wave to the downside to develop. The chart below is about as simple as they get. You can see the proximity of Thursday’s low yield, to the trend-line drawn from the December yield crest. You can also see how we gapped away on Friday. About the only ‘feature’ I see regarding the form of the rally is that it has the appearance of a wedge and there are those who believe that a wedge can be found in the 1st wave of an impulsive move. I don’t think that the original wave theory would agree and I like to keep the wave work simple which means ‘by the book’ so neither would I. I’ll try to address the structure of the rally with an intra-day chart tomorrow.
4/23/10 – 8:15 – I’m still struggling to come up with a wave count that I can
embrace with confidence but I know good levels when I see them and the cluster
of important resistance from the low 3.70’s to the mid 3.60’s is unmistakable.
The low yield yesterday in the 10’s was 3.713 while the value of the trend-line
drawn off the December yield highs, the upper trend-line of the triangle we
broke out of on 3/24, had a value of 3.711. Forget that it was also right in
the middle of the as yet unfilled gap left on 3/24 as well as being very near the
wave equality target of 3.707. There is a long standing school of thought that
says the way to trade trend-lines is to wait for a market to return to one
after it has been breached, which is why I have continued to monitor that line
and which is exactly what happened yesterday. There remains significant
resistance not far beyond yesterday’ best levels but for now, I am concerned
about the line that turned us back yesterday, as it produced a clear reversal
on the daily charts from a new high in all but the 10-year futures and even
there, it was a new high based on the ‘day session’ charts while being a
perfect double top against the high from the 19th that included the
overnight session. And while this may be repetitive, it merits repeating; the
problem I have with the reversal is that all of those resistance levels work as
potentially terminal targets for the end of a corrective move and without a
clear cut impulsive structure to the rally, a corrective rally remains a valid
interpretation of what the treasuries have done. If it turns out that they have
been correcting off the 4.01 trade earlier in the month, then objectives for
the end of the impulse that would have begun in October are still far, far off;
4.25 being a good ballpark area. Additionally, now there is a clear setup for
divergences in the daily oscillators that frequently come as a result of new
intra-day highs followed by lower closes. If the second rally were a clear
5-wave move, the analysis from here would be a tad easier but regardless, any
reversal must be respected until there is at least some evidence that a high has not
been seen. In addition to having reversed from one of several levels
that were a concern in the cash 10’s, the high of the day in the 30-year
futures was 117-29 while the wave equality target for a secondary rally there,
based on the initial impulse of 2 ½ points, was 117-31. And while at the lows
yesterday, the 10’s held a trend-line drawn from the low on the 9th,
it appears that we will open below it today – with a gap. If the last several
updates have sounded like I’m confused and concerned, then they have made their
point. To me, the bigger picture remains relatively clear. A move to either
3.10 or 4.25 can easily be explained by wave work based on what happens from
very close to current levels. I had always felt that the determination would be
made by reading the decline that follows the second impulse up. The problem is
that I cannot find a clear ‘second impulse up’ and again worth repeating is the fact
that when doing wave analysis, impulse waves should be easy to read while corrective
waves are much more difficult. It then stands to reason that the more difficult
that it is to read what bonds are doing now, the more likely it becomes that the
rally has been corrective. I had wanted to see an explosive move up this week
and while the 30’s made a good start on Wednesday, the lack of follow-through
and reversal yesterday is a real concern to me. The equities still show no signs that they have topped, but
at the same time, Goldman Sachs shows no signs that it has bottomed so I would
think that there is still some vulnerability there. The wave count on the SPX
may very well be that we have done an A-wave down to the lows on Friday and a
B-wave up which, if that proved to be the correct count, would allow for
another break before new highs should follow. That count would also seem to allow
for GS to have a secondary break without doing major damage to the broader
indices but we’ll just have to wait and see how that one plays out. The Dollar
Index has returned to the previous highs of the move and seems to be headed
higher still but just how that relates to the bond or stocks markets is
becoming less clear. Based on all that has happened this week, while I am trying
to maintain a neutral bias to fixed income until the patterns are clearer, I
can’t help but feel that a more negative bias is in order. Not only did
yesterday produce a reversal on the daily charts but absent a nice bounce
today, we are working on a key reversal on the weekly charts as well. I’d look
for a close back above 117-03 today otherwise I would head into next week in a
defensive posture. I have included a chart today that shows all of the objectives that I mentioned above, as well as in yesterday’s update, and shows a good picture of the reversal. The red trend-line is the one that originates at the December 2008 yield trough while as you can see, the orange and magenta lines defined the triangle. The blue horizontal lines show the 38% and 50% retracement targets for the yield rally that commenced at 3.10 in October and ended at 4.013 earlier this month. Finally, the wave equality target is plotted on the right side of the chart and I have also drawn a circle around the gap. Hopefully, this picture will bring home just how important the area from yesterday’s highs and extending another 5 bps, can be. billy@tbondtrader.com Should the rally extend today, and with PPI this morning
that is a possibility, there are even more important yield levels to be aware
of in the cash 10’s. The triangle that we broke out of back on 3/24 was defined
by a trend-line drawn down from the late December yield crest and another drawn
up from the February yield trough. One school of thought has always been to
play a market when it returns to a trend-line that it has broken through and
that would be the higher of the 2 lines which has a value today of 3.711. The
lower trend-line, which has never been breached, has a current value of 3.689
while one drawn up from the historic yield trough in December of 2008, is
currently at 3.687. They are all important and they are all within 5 bps of
yesterday’s close. While I would never initiate a trade based on a stochastic,
I do comment on them frequently since they are widely watched and have their
merit even if it doesn’t extend to buy and sell signals. I bring this up since
the 10’s have a bearish divergence formed over the past week and that could
serve to bring sellers into the market. Just as I had suggested yesterday with
regards to the SPX, the 10’s need to make new a high of the move and sustain it
for several days in order to eliminate that divergence. The 30’s are in new
high ground but without having made a new high in the oscillator so they, too,
need to sustain this push to new highs for a day or 2 more to erase that
potential divergence. The good news for treasuries with regards to oscillators
is that the weeklies are still mid-range and pointed up leaving them with apparently
plenty of room to improve before these will even hint at being overbought but
with important news this morning, between the many strong resistance levels nearby
and the positioning of these oscillators, today is a day that can have
significant implications to at least the short-term outlook. I’ve included 2 charts today which show what I was talking
about in the first paragraph with regards to the wave counts. The first is the
10-year and the second is the 30-year and as you can see, the move up in the
longer end yesterday was quite impressive, even commencing with a gap. That is
exactly what one would look for in the middle of a 3rd wave – or a
C-wave – the wave placement that I felt we were in. I’ll move forward in the
hopes that the last preferred count that I depicted on the 10-year chart
included in Monday’s update, and on the 30-year chart below, can still be the correct
count but now we need to dodge a potential bullet from PPI. 4/20/10 – 10:45 - The simple fact that the 10’s have made no real attempt at a rally is concerning to me. I’ll stick with the notion that a trade below 116-18+ is the one to worry about but in all honesty, the pattern is already beginning to disturb me. Wave theory makes it easy to count impulse waves but difficult to count corrections so it can be deduced that if you can’t find a good count, you are more likely than not in a correction. The book I started with stated that ‘if you don’t know where you are, you are probably in a B-wave’. Consider that a B-wave is a correction within a correction and that is the reason for that statement but the thing I want to impress upon is that uncertainty about the wave count from the lows on 4/05, tells me it may prove to be corrective. And in this particular case, the 10’s filled their overhead gap to the tick – one of my targets - before turning down and if that proves to be the end of a correction, I expect to see a move back to 4.25 or worse. To give equal time to both sides, wave theory also says that all C-waves that are not part of a triangle, are 5’s so that would seem to make the case for the rally being corrective and over, hard to make as well since the reason I am not thrilled with the pattern as I see it, the last rally is not a 5. What all of this means to me is great caution is warranted in here. So far, so good, but I wouldn’t risk much long exposure on a trade below 18+ and certainly not on a trade below first good support at 116-15. 8:45 - Little happened yesterday to warrant an update but that may
very well change today. The treasuries opened lower and stayed that way all day
long, eventually closing on their lows. One thing that does seem to be worth
mentioning is that the duration of the correction from Friday’s highs is such
that it is now likely to be either the 4th wave of the move that
began on Thursday, or else the move that began on Thursday is not an impulse at
all. That would still leave the door open for a rally, but it would change the
count. Should we trade below 116-18+, then the rally from the low on Thursday
would be difficult to label as an impulse and I will have to re-think my preferred
wave count. In that event, I will try to post an updated chart in the next
update. Otherwise, I expect to see a reversal back to new highs before the end
of the week. While Elliott is clear on what a C-wave should look like since
with few exceptions – ones that don’t apply here - they are 5’s, I have always
been of the opinion that while it is easy to identify an impulse wave,
corrective moves are much more difficult to read – and C-wave are components of
corrections. For this reason, if the 10’s do break below 116-18+ then regardless
of how I re-label the chart, I will be mindful of the possibility that the
rally is over. It will be of the utmost importance to keep one’s eye on the
ball, so to speak, as if the entire rally proves to be corrective, things can
deteriorate very rapidly. Since the soft stock market on Friday likely led to much of
the gains in fixed income, it is equally likely that the weakness yesterday in
bonds was at least partially the result of a recovery in stocks. Looking at a
chart of Goldman Sachs, the simple fact that it broke as hard as it did gives
the move the look of an impulse wave down. If it was, then the first target
back up in a correction is around 166.82 followed by 170.47. Until we see a
recovery back above those levels, a secondary drop in GS seems probable and it
seems equally probable that just like on Friday, the broader stock indices would
drop with it. As far as the S&P goes, it has a potential 5-wave decline but
is recovering rapidly and if it trades back over 1202, all bets are off. 4/19/10
- Wave analysis,
or for that matter any technical analysis, has no way to factor in news items,
and while it may have been news of Goldman Sachs being charged with securities
fraud by the SEC that pressured stocks and attracted much of the bid for
treasuries on Friday, all that it did was to validate the wave based
projections for a secondary rally. I had suggested that the minimum target for
the 10’s would be at the gap left on 3/24 and that gap was nearly filled in
futures - the high of the day on Friday fell just 1 tick shy - while in cash
the low yield was about 1 bp from the beginning of the gap. While gaps must
always be respected for their ability to attract counter-trend trades, the real
targets for this rally should be closer to the wave equality target of 117-30
in futures. Cash offers more good levels to watch for, beginning with the gap
fill level of 3.680, a wave equality target of 3.678, a 38% retracement of the
move out of October at 3.663 and then the apex of the triangle that we broke
out of on the 24th at 3.619 and a 50% target at 3.556. Any one of
those areas can represent the end of an ABC corrective rally prior to a
resumption of the bear market and they must be respected as such. But because
of their proximity to one another, the area of the gap fill, the wave equality
target and the 38% target make the range of 3.680 to 3.663 very intriguing to
say the least. Much beyond 3.55 and we may be looking at the first indications
that this is more than just a pull-back and could carry back to 3.10ish. I’ll
leave that for a later discussion. The wave structure of any significant
pullback that commences beyond this morning will be everything for me with
regards to whether or not there will be any further advancement. The stocks had
a lot to do with the rally on Friday so I do want to keep an eye on them as
well. Based on Friday’s action, I’d have to say that they will likely have at
least a secondary decline with current targets in the SPX somewhere in the
neighborhood of 1160 or lower assuming that the first decline ended Friday
afternoon - and keep in mind that currently there is no assurance that it did.
This could prove to be the catalyst needed to send bonds much higher so to be
sure, I will be counting waves in equities as well as in bonds. The fact that
the sell-off in stocks came as a direct result of the Goldman Sachs news, and
the likelihood that a resolution to that news will not come quickly, might
suggest that we have seen some sort of near-term high at the very least.
Goldman’s stock dropped as much as 28.73 at the worst levels on Friday and
closed down 22.72, so it doesn’t appear that investors are in any hurry to buy
the break. The other outside markets worth noting are the Dollar, which has
firmed up nicely and is taking on the appearance of a market with more to go on
the upside. And at the same time, Gold has now traded below the rally high from
2/22 and that would suggest that we have yet to see the lows of the move there
even if the current lows are $90 away. While market
forecasting is clearly an art and not a science, Elliott wave theory still
brings very powerful tools to the table and for that reason, I will continue to
try and track the most likely wave counts of even the smallest degree. The
chart below shows my current wave count from the bottom on the 5th
and as you can see, I believe that we are in the latter stages of a 3rd
wave – possibly the third wave within the first larger impulse up, or else the
third wave of a C-wave which, once completed, would prove to be terminal. The
final high of the rally that began on Thursday should not be more than several
days away at the most and it will be from that high that I hope to be able to
determine if it is the end of an ABC that began on the 5th, or
whether the rally will turn into a larger move with targets near 3.10. Should
Friday’s highs hold for more than half of today, then I would suspect that the
3rd wave completed on Friday and that rather than being in wave ‘4
of 3’ as depicted below, we are instead looking at the larger 4th
wave of the rally from the low on the 15th. That would allow for
just one more round of new highs before it completes and it will be from that
high, that things should really begin to clear up. 4/16/10 - By yesterday's close, it seemed that the only question was whether or not the correction that began at the highs on Tuesday morning, ended yesterday morning. Following a print in the 10-year futures just 3 ticks above the 38% retracement of the rally out of the low on the 5th - less than a basis point through the cash equivalent - and just a tick from the 50% retracement in the 30's, the treasuries reversed and recovered most of the ground that they had lost. This bounce can still prove to be a b-wave which would fail at Tuesday's highs, but that would only go to delay by a few days, what seems like an inevitable secondary rally back to at least the gap left back on the 3/24 - and perhaps much further. And the fact is that the initial rally yesterday looks impulsive and now we are set to gap up this morning, making the b-wave scenario all the less likely. One way or the other, the action and wave structure since the highs from 3 days ago, seems to confirm what the structure of the rally out of the 5th had already suggested; that at least a secondary rally is likely and the 'best case scenario', a move back towards the October yield trough, remains in play. Volume looks constructive as it remains strong on the up days although the daily stochastics are overbought. I wouldn't put too much emphasis on the stochs but I will be on the lookout for any failure from a new high that might create a divergence.The bid came into the markets overnight as the stock futures took a tumble and even though the stocks recovered, the bonds have remained firm and as of 7:30, are trading right up against the previous highs. I think that the equities continue to be a potential 'wild card' with regards to just how far the bond market rally might go. There's no question that the stock market rally has been an impressive one and has run over many a bear so one bad night doesn't mean that much, but one of these days, a simple little pullback just might turn into the first real correction since February and with so little support, that could provide some real fireworks. Once the 10's break to a clean new high beyond those established on Tuesday, and I'll want to see some confirming evidence from cash and/or the 30's, then wave theory would say they are likely to run at least as far as did the during the first rally - 2 1/2 points. I'll continue to use 115-15 as about the only sign of potential problems ahead although should we contiunue to rally today, that 'uncle point' will be adjusted up for next week. I have included a chart today that shows both the potential ‘head and shoulders’ pattern that has been forming since early 2008, as well as the potential ABC correction that could target yields as low as 3.10 on this current move. Keep in mind that for now, this is not necessarily my preferred count, but one that can materialize depending on wave structure of the current rally. The real point from my perspective is that if that larger rally did come to pass, it wouldn’t disturb the longer-term, bearish ‘head and shoulders’. 4/15/10 - The best levels of the day on Monday held all day yesterday making this corrective looking pullback already the longest since the lows. That seems to enhance to notion that we have completed some sort of wave up which for now, I will label an impulse wave. That would mean that following a multi-day correction, likely to carry the futures back to between 115-15 and 115-31, a secondary rally would develop with targets beginning around the gap left on 3/24 in the low 117's, and extending to the upper 117's. In cash, the equivalent levels would begin at the gap in the low 3.70's and extend to as low as the mid 3.50's. And all of this assumes that we are only correcting the move out of the October yield trough. The best alternative is that the move out of that trough was only a B-wave and that we will retrace the entire move back to 3.10. That possibility, I will leave for a later discussion. Perhaps, with all of this bullish talk, the more important thing to focus on is at what point the bullish case gets threatened and for me, that will occur with a trade below 115-17, although wave structure may well give an advance warning. The charts of the cash 10's and 30's are all similar enough that we can now move forward, embracing one wave count until it is proved invalid. The stocks just keep right on going with no apparent end if sight. An obvious target exists at about 1229 SPX but something tells me an obvious target is not what we should be looking for. Nothing about this rally has seemed obvious yet. A long-term chart of the Dow shows a market that is very overbought technically and with volume that has been deteriorating since the bottom. A 50-week moving average of volume has dropped more than 30% since the bottom on 3/06/09, having crested the week of 5/15/2009 - and the SPX is no different. Only the Nasdaq seems to be retaining its' volume and while that index has recovered more than 78% of the ground it lost since the 2007 top, it must be noted that at that top, when the other indices were at all-time highs, the Nasdaq had recovered only 43% of the ground it had lost since the 2000 top. The dollar continues to weaken from what clearly looks to be a 5 wave rally which lasted 3+ months and the decline will likely last several more weeks at the very least. So that's where we stand. The short-term looks to be a few days of backing and filling followed by a strong secondary rally. From any such rally high, I will, hopefully, determine how the bigger picture is likely to unfold. I'm including a chart today showing the near-term friendly count with objectives that should contain any pull-back. Tomorrow I will probably include one showing the potentially very bearish 'head and shoulders' pattern that has been developing for several years now. Keep in mind that all bets are off over the short-term if the 10's trade below 115-15 - cash equivalent 3.93. 4/14/10 - 9:30 - At first glance, yesterday's action in the 10's coupled with the 2 previous days, left them with the appearance of having either completed 5 waves up from the 4/5 low, or in need of one more incremental new high to polish off the move. Even the rally of the past 3 days, what I suspect is the 5th wave, appears to be 5-waves itself with at best one more minor new high needed to complete the sequence. Of course, all of this analysis would still need to take a back seat to this mornings' 8:30 numbers and even then, there is more news due out at 10:00 as well as testimony from Fed Chair Bernanke beginning at 10:00 and if that weren't enough for one day, at 2:00 we get the Beige Book But as we begin the day, the simple fact that from the 4.01 yield crest from the 5th, there is a rally, a pullback, an explosive rally nearly doubling the size of the first, a second pullback and then another 5-wave advance, leaves a near textbook example of an impulsive rally. And even if the pattern leaves some doubt as to whether or not they are complete, the 10-year futures have already exceeded a 62% retracement of the move out of March 18th, suggesting that a complete retracement of that move is now likely. The cash 10's didn't quite make it that far but still have the same wave structure and with only minor differences, the 30-year futures look the same as well. Wave structure on the cash long bond offers the only 'dissenting vote' but even there, while there have been only 2 rallies from the lowest low made one day after the other markets, a wave equality target would still project them a little further just to complete their second rally; 4.642 being the target. So we exited yesterday with as clear a wave-based picture as one could want and a weak opening this morning only went to make it that much prettier. And then came the news. Retail Sales came in a little stronger than anticipated while CPI was pretty much right on the screws. So the truth is that some potentially important economic releases came and went without disturbing what was a beautiful wave based picture. The rest of the day can change things but for now, I would be in the move of expecting a pullback lasting a few days followed by another strong rally. The mid to high 115's seem to encompass all of the best targets for a pullback in the 10's, numbers that may need to be adjusted slightly should we make one more new high. The wave picture is so compelling as to make the more
traditional indicators seemingly less important but for what they are
worth, open interest has continued to increase during the rally as has
the daily volume - both positive signs. Daily Stochastics are
approaching overbought levels, though not there yet, while weeklies
offer little to focus on as they are drifting around in mid range. One
more new low in treasuries or not, they now appear to be headed back
towards the area of the breakout of the triangle on March 18th and only
from any pullback following a secondary rally to that area, will wave
theory tell us if this entire move will be a simple ABC to be followed
by new lows, or just the beginning of a stronger move back to possibly
the October yield trough at 3.10. Some day when there is less to think
about, I will go over all of the various counts but for now, what is
important is how things transpire from very near right where we are. Of
course, the wave work, like any other work, is not infallible but
absent an impulsive looking decline that can't find support this side
of 115-15, things look pretty good for continued improvement. 4/13/10 - 9:30 - By virtue of having made new highs of the move yesterday, the 10-year as well as the 30-year futures now have what appear to be a 5-wave advances off of the lows made back on the 5th of this month. The cash 30’s have a different look since they bottomed a day later but still, having made new highs yesterday, they appear to be headed higher as well, in a secondary rally. Whether or not this is the beginning of a much larger move, one that could carry the 10’s back to their October yield trough of 3.10, or whether it is just the A-wave of a simple ABC with objectives nearer the apex of the triangle around 3.70 remains to be seen. That determination will only be made following the next leg up and for now, there is still no evidence that this leg has completed. With Retail Sales and CPI scheduled for release at 8:30 tomorrow followed by testimony from Chairman Bernanke at 10:00, it would seem likely that we do stall today and await the news tomorrow. The potential 'head and shoulders' top on the yield charts that has been developing since March is consistent with the friendly wave count although it really doesn’t help sort out just how far this rally can go. A simple ‘measured move’ would project the 10’s back to near 3.70, just like the minimum targets we have based on wave theory but from such a ‘topping’ pattern in yields, there really is not limit on how far we could go so for now, let’s just be satisfied with it being a confirming indicator of higher prices to come. With the Dow having closed above 11,000 yesterday for the first time since September of 2008, a second close would seem to suggest that we are headed to the next target area in the SPX at 1228 so we will be watching closely from here but like bonds, tomorrows numbers and testimony will matter. Everything now seems to be pointing to higher prices but with a pull-back still likely from the end of this first rally phase. If the news is good tomorrow and this first rally extends far enough, we may be able to eliminate all but the most-friendly of wave counts but that is getting ahead of ourselves. The reversal last week from a near exact print of the June yield crest of 4.014 makes that bullish count seem very likely since that was the perfect target for a B-wave, but you can’t get to 4.25 without first trading at 4.01 so we must remain cautious about the possibility of a renewed bear market following any apparent 3-wave rally off of a very obvious support point. 4/12/10 - 9:30 - Having been watching for a breakout from the range of 115-15+ to 116-09 as the best clue to the next move of any significance, Friday's range was 115-18+ to 116-00 leaving us in the same mode for today. The range in cash on Friday was 3.875 to 3.927 while the range to watch there is 3.838 to 3.937, so I remain in 'breakout watch' mode. Unfortunately, I cannot use the 30-year for confirmation since the low in that maturity came on the 6th and not the 5th like in the 10's. The pattern difference that creates is that from the 6th, there has been just one leg off the top and not 2, meaning that the 30's cannot be placed in a possible 4th wave like the 10's. Rather, they must be read as simply in a 1st wave, or an A-wave and that doesn't help much with wave counting. It is the simple fact that the 10's can be in a 4th wave that allows for using the range as a leading indicator since wave theory says a 4th wave cannot enter the range of the 1st wave. That is why we cannot tolerate a trade below 115-15+ - the only possible level that can be called a wave-1 high - without labeling the entire rally as a 3-wave move, while any new high allows for labeling the entire move as a 5. This may sound thick if you don't follow the wave theory closely but to be sure, the theory is pretty clear with regards to the 10's. Below 115-15+ and sharp new lows will seem likely while a trade to a new high above 116-09 first, will give the rally the appearance of a 5 with at least one more 5-wave rally to follow. As far as the 30-year goes, since the bottom occurred on the 6th, there is just one wave up, with no way of determining if it might be part of a 3 or a 5. That would suggest that there will still be another rally and that should give cause to favor the more friendly count in the 10's, but the fact is that I trust the wave patterns in 10's more than I do in 30's and with a relatively small range to watch for there, I'll stick with the plan of waiting for a breakout beyond 115-15+ or 116-09. There is another potential pattern that has been developing in fixed income since late March and that is a potential 'head and shoulders' visible on the yield charts. Were it to continue to develop, it would create a top on the yield charts and that, of course, would be bullish. We would have already seen the completion of the left shoulder and the head with the range for the right shoulder likely to be from about 3.81 to 3.92. The picture would look best were we to trade in that range for several more days but beyond either end of that range, we could expect an extension of the move and that is very consistent with the above mentioned, wave based trading range that I am focused on. So at the end of the day, the only prudent thing I see to do is wait out the markets until, by virtue of breaking beyond a relatively tight range, they tell me which way they are likely to be headed. Today's eco calendar is light as is tomorrow's although there is some Fed talk scheduled including that of the Fed Chairman, but Wednesday is a different story with both Retail Sales and CPI coming out at 8:30 as well as testimony by Bernanke at 10:00 and given the relatively tight trading range that I am monitoring, it seems highly probable that I will not be watching it beyond Wednesday at the latest. Stocks, meanwhile, just keep going higher regardless of what anything else is doing. Overnight, the S&P futures traded at 1198.50 which would have placed the SPX around 1200, right up against the first of 2 solid objectives; the second being near 1228. Another thing that might merit watching is the Dow, as it poked its' head above 11,000 on Friday before closing just below it. This is just another one of those psychological levels that begs to be watched for a possible break and reverse. Two closes above it would seem to suggest that any impending high might just be a ways off. One thing worth repeating from last week is that support areas in equities are few and far between and once that market does reverse, any decline could be rather precipitous. And finally, on the news front, an article from the New York Times published on Saturday headlines "Interest Rates Have Nowhere To Go But Up". It points out how historically low rates have been and how not only will U.S. borrowing costs likely send treasuries rates higher, but how the lack of intervention by the Fed into the mbs markets will put upward pressure on mortgage rates and how both auto loans and most importantly to more people, credit card rates are likely to be headed up as well. To be sure, the New York Times is not noted as a wonderful source of investment advice but even if the short-term seems to contradict what that article says, our work would suggest that over any extended time horizon, it may well prove to be true. And why not give equal time to a more friendly story from Bloomberg this morning that quotes Bill Gross as saying that any up tick in mbs rates following the recent exodus by the Fed from that market, will likely be met by investor buying to take advantage of better returns and that, he believes, will serve to keep mortgage rates low. So
here we are, beginning the day with the 10's trading at 115-26, 15
ticks from the upper end of our critical range and 11 ticks from the
lower end. Something has to give and likely will pretty soon. Until it
does, however, we just don't want to stick our necks out on what could
prove to be a chopping block. 4/09/10 - 9:30 - In
Monday's update, I said that
I felt we would see the 4.014 yield crest from June tested on Monday or
Tuesday
at the latest and that the structure of any rally from there, should
one
materialize, ‘would tell volumes about the next big
move’. By Wednesday's
update, the 10's had reversed from 4.013 and the feeling then was
that once we
got past Thursday’s 30-year auction, the patterns would likely
have cleared up
considerably. Well, here we are on Friday and while nothing is
perfectly clear
just yet, we now have a manageable range from 115-15+ to 116-09
– 3.937 to
3.838 in cash - beyond which in either direction, I can draw some
rather
concrete conclusions. If we trade below 115-15+ first, then the entire
rally
will appear to be corrective and that would suggest that we will see at
least 2
more impulses up in yield, with targets near 4.25, being very
realistic. On the
other hand, if we can make a new high above 116-09 first, that would
leave the
rally from the 18th, appearing to be a 5-wave move and that would mean
at the
very least, there will be a secondary rally with several targets
ranging
between 3.55 and 3.70. And it is also worth mentioning that above
116-12, we
will have an outside-up week. I can go into other types of analysis -
and will in a moment - but from a wave perspective, there is no
need to, as
breaking out of that range one way or the other, means everything
for
now. So what do the other indicators say?
Well, volume and open interest are both friendly as the volume has been better
on the up days than on the down days while open interest has been expanding as
we have rallied. Daily stochastics are moving up from oversold territory and
are not yet overbought so that, too, is bullish. The weekly stochastics are not
so friendly, however, as they are pointed down, just as they have been
since 3/12, but have not yet reached oversold territory. Stocks had a fairly interesting
break late Wednesday but recovered nicely yesterday and continue to defy logic
and gravity and move higher and higher and higher...... Targets remain at 1199
and 1228 and I'll need to do some further work to find others but suffice it
to say that for now, there are no obvious signs of an impending top. There are,
however, signs of internal weakness based on things like TRIN,
while the Commitment of Traders report, released weekly, shows a growing
number of commercial shorts. I only continue to mention stocks since they have
little good support below and any hard break there could go a long way in
eliminating the most bearish of bond counts. The
dollar has firmed up nicely from
what could have been interpreted as a 5th wave high but isn't
really telling me much that is new. It is still strong but can
still be
interpreted as being in a 5th wave. The daily stochs show nothing of
interest
but the weeklies are overbought and with bearish divergence. Any
significant
failure now would leave those charts with sell signals but keep in mind
that I am talking about patterns on weekly charts and therefore, any
signals
generated need to be based on a Friday close and that isn't likely to
happen
today as we are working on a fairly strong weekly bar. So with regards to the 10-year, it all comes down to what I knew it would - pattern. There are still several potential wave counts in play should we impulse up to a new high, the difference in them being just how strong the rally is likely to be. On the bullish extreme, 3.10 is very realistic while at the very least, we should see a move back to the area of the apex of the triangle that was completed on 3/18 - around 3.65. Conversely, should we trade below 115-15+, 4.25 seems like a minimum target even though there is solid support close to 4.10. To me, the only thing that matters now is do we make a new high, or a break below 115-15+ first. And one last thing seems worth mentioning. Regarding timing for this current pull-back; what I am calling a possible 2nd wave following the initial bounce from that 4.013 print, lasted 6 market hours and we are currently in the 6th hour of this pullback. If it is a 4th wave – the more bullish picture - then the optimal time for a turn-around is now. It could be off by an hour but this morning we have already come close to 115-15+, but it continues to hold. And along the same lines, without the benefit of an exact number, it appears that the bonds make a high or low for the day, in the first hour, on well over 60% of the days. That would suggest that if we can just trade back above the high of the first hour, there is a better than even chance we have seen the low for the day. Right now, that high is at 115-25. I’ve mentioned before how wave work is all about a process of eliminating counts until one stands out. I may be able to eliminate one direction or the other today and that is what I am waiting for. 4/08/10 - 9:30 - A great auction seems to have added significance to the 4.013 print 2 days ago as we moved sharply away from the lows yesterday. That seems to have at the very least, ended an impulse wave that began on the 18th, but just what the yield crest represents is still in doubt. The placement of it, nearly an exact double print of the high yield from last June, seems to add credence to the notion that it was a B-wave and we could see 10-year yields run back to 3.10, but it just too soon to know if the reversal from that levels was not just based on that being the most obvious resistance on the charts. Now, the best alternative to the 4.013 print being a B-wave, seems to be that an impulse began in October, which would have been the 5th wave up in yield from the December, 2008 trough and that would seem to point to the mid 3.60's as a good target for this rally. There remains one, more bearish count, which would have the area of 3.81, a likely candidate for a turn-around but that one seems to be the least likely. For now, as has been the case for several days, I want to see the make-up of this rally and while right now, it has all the look of a developing 5-wave move, a failure now back under 115-15+, would force a 3-wave label on it. A correction from any high lasting the better part of the day and followed by another new high would create a 5-wave rally and that would mean a secondary rally should follow a correction. That would likely eliminate destroy the 3.81 target and allow us to zero in on at least the 3.60 handle. I felt a few days ago that we would need to get past the auctions and I still think that is what it will take to give the pattern the necessary structure to make a definitive call. 4/07/10 - 9:30 - The market has firmed up overnight for the second consecutive time and now the 10's appear to be targeting the 115-22/25 area in futures - 3.90 in cash. At the worst levels of the day on Monday, the 10-year traded at 4.013 while the perfect target for a bottom, if the entire move from the October yield trough was a B-wave which is the most bullish count, was 4.014. That's was close enough to get my attention and especially following the upside gaps yesterday morning. But the gaps didn't make it through the trading session and at yesterday's lows, while the 10's had retraced only about 50% of the 'bounce', the 30's gave back a full 80%, making the case for whether or not treasuries are impulsing off the lows, still too close to call. And whether or not they are impulsing is everything, since an impulsive rally could be the beginning of a move back to 3.10, but a corrective rally means that we have not seen the lows of this current push. And if we haven't seen the lows, then while a slight break of 4.014 would be acceptable if it were followed by a quick reversal, in any other scenario the preferred wave count would be that treasuries were impulsing up in yield from October in which case any rally beyond 3.60 would become highly unlikely regardless of how far down the road we look. The point is that my interpretation of wave theory says that this is 'make it or break it' for long-dated treasuries. With a 10-year auction today and a 30-year tomorrow, expect volatility especially around 1:00 and hope it is in the direction of lower rates. While new supply typically pressures a market, I always find it difficult to guess what happens coming out of any auction. As I had suggested on Monday, the structure of any rally off of the 4.01 area will be of the utmost importance to the analysis so the next several market days - or possibly hours - should tell me volumes. I also mentioned on Monday that the cash 30-year had traded through a trend-line dating back to October of 1987, and it has yet to re-gain its' footing. Yesterday it made new lows again and closed at 4.844 while the value of the trend-line was 4.749. That's a clean, 2-day break and of real concern.. Stocks continue to make new highs and on lower volume. Now, even the 50-day moving average of volume has turned down but the market continues to defy any bearish technicals as it pushes higher. Targets for the SPX remain at 1199 and 1228 but with little support below. The next 2 days will be all about pattern - and those will be subject to the auctions. The markets will likely make some noise at 1:00 p.m. and any number of bulls or bears might have their finger on the trigger to buy - or sell - against 4%. My focus is on how we rally - if we rally. Right now, based on very short-term intra-day charts, the 10's appear to need one more new low to complete a 5-wave move from the 18th, but that analysis cannot be confirmed with a 30-year chart and new lows in cash would be a concern. One more new low or not, the time for a rally is now. The intermediate and even longer-term projections should become much clearer in the next day or 2, with auction time tomorrow likely to be about as far as we can make it without at least the short-term patterns becoming much clearer. A trade above 115-25+ will be at least mildly friendly while a failure from just below there, followed by a break below 115-15, will be just the opposite. 4/06/10 - 9:30 - Looking at an article today in the Washington Post, I see that there are a wide range of notions as to just why 10-year yields have shot up nearly 40 bps just since 3/18. They range from 'investors are becoming more comfortable with riskier investments and thus are moving money out of treasuries' to 'inflation expectations' to 'worries about borrowing needs drowning out demand' to 'lack of fiscal responsibility on the part of the U.S. Government' to, to the belief that 'the economy has turned the corner' to, well, just about anything you can think of. The way the article reads, it seems that everyone has an opinion to the exclusion of all others. What seems more likely is that people have been selling treasuries for all of the above reasons and likely, for several more. That's what makes a bear market; more sellers than buyers - for any number of reasons. Yesterday, the 10-year traded to a 4.013 while the source of my target of 'near 4.01' was the yield crest from June of last year at 4.014. Elliott says that in a 'flat correction', the A and B-waves are 3-wave moves and the perfect target for the B-wave is the point of origin of the correction; in this case 4.014. Whether or not the move from October is a 3 or 5-wave move is debatable but for now, the target we hit is picture perfect. So now we can only wait and see how we come out of here. An impulsive looking rally could go all the way back to 3.10, while if the structure is corrective, the 4% area won't hold. Even another stab to a slightly higher yield could be acceptable if it is accompanied by a quick reversal but to be sure, the 10's can't get from 3.60 to 4.25, without first hitting 4.01. The point is that just because we got here, and bounced, is no guarantee that we will hold. The auctions beginning today and taking on added importance tomorrow and Thursday when the 10's and 30's go off, may be the determining factor but for me, the most important thing will be the structure of any rally. For now, things look pretty good with an upside gap this morning, but we have a long way to go to confirm that this is an impulse and not just a correction. Patience is still in order. I still see 3 workable wave counts and 2 are more bearish near-term. Additionally, if we are in the early stages of a large C-wave rally, there will be plenty of time to get on board. Best targets for today's burst to terminate are at 115-12+, 18+ and 24. For now, only a trade back below 114-30+ would confirm a 3-wave structure to the rally but a trade below 115-07+ would get me out of any long. 4/05/10 - 9:30 - The markets closed early on Friday but not early enough to keep the 10-year futures from returning to the 3/25 lows. Cash 10's exceeded those same lows, coming within 4 bps of that 4% barrier/target I've been expecting. With an outside down day and a close near the lows, I fully expect to see new lows posted early this week and if that happens, 4% will likely be tested. What happens there is the $64,000 question and should we rally, then how we rally will be of paramount importance as well. And if potentially negative wave patterns weren't reason enough to be bothered, then the fact that the 10's sold off a full point in the abbreviated session on Friday, following a market friendly, NFP number should have been. A bad day on a good number is never a good sign. But before we get too negative, we must pay close attention to the 4% area, as based on my best interpretation of the wave theory, 3 things can happen and while 2 of them are not very good even in the short-term, the other is rather friendly and needs to be respected until, by process of elimination, I am forced to abandon it. Let's examine each of these 3 possibilities. For starters, the 10's could go sailing past 4% like it wasn't even there or they could reverse and rally. Well, you might say 'that's pretty obvious' and you would be right - or you might say 'that's just 2 things' and you be right again. The third thing has to do with how they rally - if they rally. If the 10's only look at 4% on the way by, then I would place them in a 5th wave from the all-time yield trough back in December of 2008, but I would also place them in a 5th wave from the trough in 10/09 as well as in a 5th wave from the apex of that triangle that completed on 3/18. That would seem to mean that they wouldn't keep going up in yield for much longer and there are reasonable objectives to be respected near 4.10. Beyond there, 4.25 seems like a distinct possibility but I'll deal with that later. From anywhere beyond 4.04ish, once they manage to reverse, they could be expected to begin a protracted rally back to near 3.65 or so. If, on the other hand, they reverse from very near 4.00% and begin to rally, but the rally is corrective in structure, then the bottom is further off in both price and time, as that would mean that the yield rally that commenced on 3/18, was only wave 1 of a bigger 5th wave. In that scenario, 3.25 may be the best case target. Finally, if they reverse from very near 4.01% and rally in an impulsive, 5-wave structure, then they could be in the very early stages of a giant C-wave, which would complete a correction that began at 4.014, back in June of 2009. That would give them a realistic target near 3.10. While this may sound like trying to grasp onto just about any possibility, the test of 4% can happen at any time and the subsequent action can tell us volumes in just the first days - or even hours. Patience is in order here - patience coupled with a healthy dosage of caution. Friday's sell-off also sent the 30-year soaring through a trend-line on a yield chart drawn from the yield crest in 10/87, a crest set in place by the stock market crash. That, along with the timing implications that go along with apex of the triangle having occurred on the 18th of March, a perfect timing hit for a significant trend change, is probably reason to bias a bit towards the more bearish of potential counts in here but again, much should be resolved very soon so why guess? Stocks remain strong with the best 2 upside objectives that I can find being 1199 and 1228. Probably the one thing that makes stocks vulnerable in here is a product of how strong they have been of late as now, there is little in the way of good support for a long, long way. A trend-line near 1100 may be the first, obvious area that could be labeled even intermediate support. In addition to potentially heavy looking charts based on timing and wave structure, this week $82 billion in treasury supply will come to market in the form of 3, 10 and 30-year securities. I never like to guess what an auction will do to the markets but one thing that is usually true is that that will have an impact and much of that impact can be expected to manifest itself at 1:00 p.m. on the auction days. Those would be Tuesday, Wednesday and Thursday. And if the markets still need more news to focus on, an article published today in the WSJ, suggests that there is a tug-of-war at the Fed regarding inflation dangers going forward. One camp feels that there is no problem while the other feels quite the opposite, believing that the weak housing market is masking the true forces at work. It strikes us that anyone at the Fed has an opinion worth listening to and if members there are that divided on such an important question, then who are we to think we know? And none other than Alan Greenspan has also chimed in since Friday suggesting that the job growth seen last month is not just a blip on the radar screen but likely signs of a resurgent economy. So we enter this week with what appears to be a date with 4%, the result of which can have large implications going forward. I do expect to be able to sort through the noise and settle in on a preferred wave count before weeks end, given the likelihood of increased volatility from the auctions, if nothing else. For the short-term, nothing short of a trade back above 115-26 would mean anything to the contrary of what I currently think and even that is not enough for me to abandon my current preferred wave count. The plan is to move forward with a negative bias and try to avoid being exposed to the long side unless and until I see evidence that a rally is likely to unfold. 4% is huge and likely to ignite some fireworks when it is tested. Watching that fireworks show should be fun and provide us with many of the answers that we are looking for. 8:35 a.m. - After watching the 10’s tread water
for the past week awaiting the jobs report, the Labor Dept. announced that NFP
increased by 162,000, less than the 185,000 consensus but still a positive
number for the first time since that measure of the economy slipped into
negative territory back in late 2007. Just that headline alone should be a
welcome relief to many. So what did the 10-year do? Well, after a brief
up-tick, it backed up and 5 minutes after the release, the range for the day
was 115-22 to 116-10. Prior to the release, the range for the week had been
115-20 to 116-12. Hmmm. Obviously, one cannot draw any real conclusions when
the range we have been analyzing hasn't changed but unless we can recover
today, the fact that the high for the week is right on a great objective
would seem to put the burden on the bulls if we aren't likely to see further
selling by next week. The other technical features to keep in mind are
that we already have an outside day so a close beyond either end of yesterday's
range - 115-26 to 116-28 - would look meaningful. Additionally, the close last
week was 115-30+ while the opening this week was 29+ so that, too, is an area
to watch for when the days’ trading comes to an end. I came into the week with
a negative outlook and appear to be exiting it in the same way. Stock traders seem to have liked the
number as futures are trading in new high ground, something that seems to have
become a habit of sorts. We are now trading at the best levels the S&P
futures have seen since 9/29/2008. Up and up and up it goes and where it stops,
nobody knows. Daily ranges in the equity indexes are still surprisingly small
for such an apparently strong market and they are still shrinking – something we
don’t like. There is an overhead trend-line that should offer up resistance, at
1199 today, which is 21 points higher and other than that, the next real target
is near 1229. The dollar has weakened some this week and the notion mentioned a
few days ago that it looked to be in a 5th wave up off the bottom is becoming
more realistic. That would allow for more weakness but it would most likely be
corrective in nature and therefore, choppy. For now, the bigger concern
continues to be the fact that the breakout of the triangle last week implied
that rates should head up to at least the 4% area and only there will the
bigger wave patterns have a chance to unfold - and nothing has happened since
to alter that outlook. And not to be lost in the shuffle is the fact that
30-year yields have come up against a trend-line drawn from way back in 1990.
That line, which has not been exceeded yet, has a value this week of 4.791,
while the high of the week is 4.803. So far, so good if we can close here but
the high yield this week should now take on added importance to any long-end
traders. If you look at a weekly chart of
10-year yields, there is an unmistakable head-and-shoulders yield bottoming
pattern that began its' formation way back in early 2008. The range that
contained the left 'shoulder' and 'neck line' was 3.28 to 4.32 before the
plunge to 2% capped off the rally in December of 2008. Since then, the range
that has contained the right side of the pattern has been 3.11 to 4.01 so while
not perfect, it still seems to fit the general description of the pattern.
Even volume seems to confirm it since it has diminished since the left shoulder
was formed, dropping to extremely low levels at the trough or 'head' before
rebounding lately but not to levels seen during the formation of the left
shoulder. This is a very long-term pattern and one that should keep us on
our toes for signs that it is finished, as that would suggest a move to near a
5% handle in the first impulse out of it. For now though, it remains just as
likely that the pattern is not complete and that would still allow for a move
back into the lower 3% handle. This, too, should begin to clear up when we see
what happens around the 4% area should it be tested and I still suspect it
will be. On a subject near and dear to us
all, on Wednesday the Fed ended its' mbs purchase program that began back in
January of 2009. When the plan was announced the previous Thanksgiving, spreads
of 30-year mortgages to the 10-year were more than 250 bps as 10-year treasury
rates had just begun a 170 bps plunge in just 5 weeks before bottoming out in
December of 2009. That spread was nearly twice the historical norm. 30-year
rates dropped more than 100 bps in just a matter of months and have remained
low since while spreads are in the 60's. It was feared that once the Fed
stopped the program, spreads would widen dramatically and rates would shoot up
and actually, most thought that those moves would have begun once it was announced
that the program would cease, but for the most part, the markets have not yet
made a dramatic shift. Of course, just since October, rates for 10-year
treasuries have jumped 75 bps and that isn't helping the mbs markets but still,
we can't complain about the performance of mbs - at least not yet. So for now, while not yet clearly out of the trading range that has dominated the markets all week, most everything still point towards higher rates. We still need to exceed last weeks' lows to make the move out of them appear to be a completed 5-wave move and then and only then, will any bigger picture begin to come clear. Should we reverse and rally up through 116-25 or 3.71 in cash, we may need to reconsider just what is going on but for now, absent a strong reversal today, I would expect to see lower prices next week. 4/01/10 - 8:35 a.m. - As far as the bigger picture goes, little to nothing has changed over the course of the week. Yesterday's high in the 10's came in right on the 50% target and already this morning, we have traded inside of the first rally high off the lows of last week. That means we cannot be impulsing up since in an impulse, this would be the 4th wave correction and 4th waves cannot re-enter the area of the 1st wave. That means that the rally is a 3 and therefore, corrective. That kind of analysis should 'seal the deal' with regards to what I have always thought was a corrective rally based on how we got to the lows, but we still have to get past tomorrow before we can place too much emphasis on patterns generated from short, intra-day charts. That said, the cash 10's look weaker and even more corrective than the futures so if there is to be a position carried into the numbers based on my work, it can only be a short, although keep in mind that a reversal from a new low of the move is entirely possible. If anything else with regards to pattern materializes today, I may post an update but I don't expect that to happen and will otherwise not do another update until sometime after the numbers tomorrow. |