^_Tbondtrader

8/31/10 – 8:15 – As bearish as things looked on Friday’s close, it is difficult to make a bearish case today. The only instrument that I watch that could still be counted as in a possible impulse wave down as of yesterday’s close was the cash 30-year and that is likely to change with the opening today. Otherwise all of my charts have confirmed that the decline is a 3 and therefore a correction prior to new highs. Much of what was bearish after last week was not wave related; most notably the timing and the key reversals as well as the outside down weeks on several charts and so from that perspective, one could still draw the conclusion that a top of some degree has been seen. I, however, lean so heavily on wave theory that it is very difficult for me to fall into that camp. There is one pattern described by Elliott called an AB top and that basically describes a double top where the second rally is a 3 and then there is always the possibility of what Elliott called a 5^th wave failure which would describe a final rally that simply failed to make a new high so there are still scenarios that would allow for the highs to be in place but until I see a 5-wave decline followed by a 3-wave rally I won’t be able to make much of a case that the rally is over. And this morning the markets are up again, more than ¾‘s of a point in the long end, increasing the chances that new highs may be seen prior to the jobs report. Wave theory could still allow for some further downside if the highs are not exceeded quickly but even in that scenario, the treasuries would likely be in a B-wave now with new highs likely no later than early next week.  

Early yesterday morning the treasuries were up strong with no help from stocks but what began as a quiet day in equities turned into another poor performance and that seemed to help the treasuries retain their bid. Twice the SPX has rallied from 1040 and twice the rallies have gained little traction. This morning they are once again pressing the lows and it is looking more and more like the 1040 area will give in to a probable rapid test of the July bottom at 1011. It has always been my concern that if the SPX broke 1040, a short treasury trade might not work and it is beginning to feel like that may be what is about to unfold. Volume was not all that impressive yesterday and that could still prove to be the saving grace if there is to be one but as in bonds but in reverse, if the 1040 lows are not about to give way today, it is becoming more and more likely that they won’t hold for more than a couple of days at best. The fact remains that there was great support in this area as well as stochastic buy signals coming from bullish divergences and now rather poor volume on the down days. Additionally, the TRIN system that I track gave a buy signal on Friday which covered a previous short at a slight profit and then it gave another yesterday. Everything seemed to add up to a rally but it seems that if one cannot materialize, all of those bullish indications can prove to be a trap for the bulls and exaggerate the selling once the support gives way. And if the support does give way, being short treasuries is likely not to be a very good position.  

With the treasuries now having traded through any logical stop for a short trade but still possibly in a B-wave rally, I think it a good idea to let the dust settle and try to zero in on the patterns as we get closer to the jobs number. For now I think flat is a pretty good position, not because I don’t think much is about to happen but rather because it is becoming much more difficult to trade with any sort of reasonable risk/reward. If this rally proves to be a B-wave, then a less risky entry might be offered near the lows made yesterday morning. If it isn’t, I’m not yet sure just how far the next push could go. Below are 30 minute charts of the 10’s on the left and the 30’s on the right which illustrate just why it was difficult to determine the best wave count as of the close yesterday. Remember, in an impulsive sequence, the 4^th wave cannot re-enter the area of the 1^st wave. I have drawn a horizontal line over the yield crest of what would have to be considered the 1^st wave along with a red arrow pointing to it. It appears that by this morning, the 30’s will trade through their 1^st wave yield crest at 3.584 putting the previous extremes made last Wednesday square in the crosshairs. 

Now that we’re dealing with a new contract and new numbers, I thought I would show one more chart, the daily chart of the December 10-year futures contract with the Fibonacci retracement targets drawn on it from the low on 7/14. How can you fight with this picture?

In my opinion, that above chart can depict a market that is about to make a 5^th wave high, or it can be interpreted as having completed a 5-wave move and be about to begin another. I obviously don’t believe that wave patterns must work or that there is but one interpretation of any pattern. Rather I think that the market will do what it is going to do and we can only try to anticipate and react. It very likely will take Friday’s data to determine if there is another 5-wave move to go or if the next new high is likely to produce another violent reversal like the last. And then there is that variable called the stock market. I still think that the best wave count there calls for a move to 950 and how – and if – such a move develops will tell me whether to expect even that area to hold. The previous lows at 1011 should provide good support but once we test them, to me it will seem even more likely that a further plunge will be likely.  It may be too early to stand aside this market awaiting the jobs news. A stop on any longs should be placed at 124-31 at the lowest with 125-07+ not such a bad idea. I can’t see still being short so I don’t know where a stop should be on a short trade but if stocks break, I wouldn’t underestimate just where the bonds might go.

8/30/10 – 8:15 – Following the seemingly loud statement made by the treasuries on Friday, a strong bid has returned to the markets over the weekend without even any help from stocks. Both the 10’s and the 30’s are up half a point this morning leaving some doubt as to what the big break last week was all about. The 10-year opened on Friday morning with a mild bid but dropped about 20 ticks on the GDP numbers before recovering to make a new high for the day shortly after 10:00. Then, without much warning, it just collapsed, eventually closing down more than a point, the 30’s down more than 2¼. Tuesday’s upside gaps were taken out in spades eliminating any worries that there might be an island top – at least right now. There remain gaps below from back on the 16^th but with the strong bid this morning they are not in play. The 10’s also traded through the swing low made on 8/19 making that the first swing low since April that produced a new high of the move and then did not hold. While the only thing that seemed to stem the selling on Friday was the closing bell, the fact is that the low tick in the 10-year was a near perfect hit of the 38% retracement target of the move out of the July 28^th low. That low was taken out last night with a low tick of 124-29+ before the recovery commenced and now an up-trend line drawn of a low back in April has reached a value of 124-23 for today and by Wednesday, it will have moved up to 124-30. In other words, by Wednesday, today’s overnight low would become critical to the continued health of the up-trend. One caveat to that analysis is that tomorrow, the December contract becomes the lead contract and we will be dealing with altogether new numbers but it is still safe to say that given the degree of the sell-off last week and now the recovery today, whichever extreme the 10’s can exceed first - the high from last week or the low from last night – might well dictate the health of the markets going forward. Besides all of the negative evidence that developed during last week, the 10-year futures as well as the 5-year cash and futures produced outside down weekly reversals and coming on such a perfect week for a trend change, I would have been hard pressed to see this overnight bid coming; more so even than the break on Friday. While I hate to bring this up, it could all come down to the jobs report at the end of the week.

 In most respects I was more surprised by the behavior of the SPX on Friday than I was with that of the treasuries. It opened higher and then reversed to take out the 1040 support area that I felt was a must hold area if a rally were going to develop. Of course it had already been taken out on Wednesday with a trade at 1039.83 but that hardly seemed to matter so when that low was taken out on Friday things looked pretty scary but this time down the low came in at 1039.70 before the index reversed once again and took out the highs made on Thursday proving even further how important that support really was. Now the SPX has got basically got a double bottom and an outside up reversal as well as a gap just ahead that fills at 1067 with a chance at an island reversal bottom although as this point, it doesn’t seem likely for today. I always felt that a rally from the 1040 area should materialize but have doubted that it would produce any sort of new bull market. Things look better now than ever before but I’m still in the ‘bear market rally’ mode and have yet to find any reason why my previously stated 950 objectives won’t be met. When I first mentioned the 1040 support area, I said that the support there was substantial and that if the index would go there and reverse, it would appear as though a ‘head and shoulders’ bottom was being formed. Below is a chart that shows the pattern with blue arrows under the shoulders and the head and with red arrows above the neckline. I’ve also included a volume histogram which does not at all support the notion that it this is a head and shoulders since volume should be greatest on the left shoulder and the head but greatly reduced during the formation of the right shoulder. That probably won’t matter much to any bulls, however, looking for a reason for a rally so I suspect we still have a pretty good push ahead of us. If my much more bearish scenario is not going to materialize, this is where I always felt it would break down and that is still what I think. Also included on the chart is the cycle stochastic and as you can see, it is pointed up so I’m looking for more upside this week but 1080 t o 1100 will be tough to overcome.   

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I’m attaching 2 charts of the 10-year, the first is a daily and the second an hourly. The daily chart includes the volume histogram as well as the Fibonacci retracement targets for the decline if the impulse began back on 7/14 and also the trend-line I mentioned above. For starters, look at the volume and as you can see, beginning with the strong rally on Tuesday of last week, it has been far greater than at any time prior with the biggest volume day also being the largest down day. That is probably a warning sign that something has changed. Secondly, notice the proximity of the low on Friday to both the Fibonacci retracement as well as the trend-line suggesting that low is now critical. The hourly chart shows what appeared to me to be waves 1, 2 and 3 of a developing impulse wave with what would be the 4^th wave still developing. As you can see, what would be the second wave lasted about 7-8 hours while if a 4^th wave began mid-day Friday, it would be entering the 3^rd hour this morning. That count would break down with a trade above 125-28, the wave-1 low which is not too far off now. I’ll be re-working all the numbers for tomorrow when the December contract will become lead but let’s get past today and perhaps I will also have more clues as to the wave structure.

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As far as today is concerned, based on structure alone I would be using 125-11 as a stop on any long exposure while 125-29 is a good stop for short trades. That part is simple. There was so much evidence by the close on Friday that a top of some degree had been seen, this early bid has me wanting for a stronger opinion of just what it means. Having occurred overnight, you can be assured that the rally has come on very light volume which is just one more bearish clue but if you are l ooking for a bullish one, look no further than that old saying ‘bull markets die hard’. Having taken out that swing low from 8/19, the first of its’ kind since April, there has been a significant change in pattern unrelated to wave analysis but by almost any measure, the up-trend has yet to be broken.

8/27/10 – 8:15 – Yesterday provided little new input although if anything, the wave structure is consistent with the notion that Wednesday was the beginning of something bigger. How much bigger remains to be seen. While still not entirely clear, the decline looks to me to be impulsive while the action off of the lows looks more corrective. That in and of itself is not all that surprising as after a hard break in any direction, some hesitation is a likely follow-up but given all of the reasons that I highlighted in yesterday’s report supporting the idea that a top of a large degree might have been made, I want the market to prove to me that it can still do better. And because of all of that evidence and especially because of the timing that was generated from the weekly chart, if those highs don’t hold, I see no reason to think that the 10-year will not eventually trade through 2%. If I had to come up with one reason why that last statement wasn’t true, it would be the fact that the 30-year has yet to exceed a 62% retracement of the move up in yields from December of 2008 but keep in mind that the 5-year has retraced 95% of the move so I’m not sure how important that really is. Before I go any further, let me say that the weekly charts are not yet negative looking since they don’t even reflect a lower close since July 30^th and can easily be interpreted as still being in an impulse wave – probably a third. The dailies at least show the huge reversal yesterday but by most any measurement, the trend is still up. Keep in mind that trends rarely show indications of change at tops and bottoms. It is the cumulative amount of negative clues that have me concerned. Absent a hard down day today, there will still not be lower weekly closes on the longer-dated treasuries since the 10-year would have to close below 125-17 while the 30’s would need a close below 134. The cash equivalents are about 12 bps away. Not so for the 5-year as last week’s close was at 1.392, less than a bp away and that might be something to keep in mind. Just 7 bps away at 1.453 is last week’s high yield in the 5’s so a close through there would be the strongest evidence yet that an important top may have been seen. There has not been an outside up reversal bar on a yield chart since the yield trough in December of 2009. Remember that the entire rally that began back in June of 2009 was initially led by the 5-year. I would be using very tight stops on all trades, long and short, until I had a clearer indication that we were still in a rally mode. The markets have come a long way and as long as yesterday’s highs hold, extreme 2-sided volatility can become the norm.   

I think that the stock market will remain a major key to the bond market. The low tick on Wednesday in the SPX was at just as perfect of a spot as was the low yield in the 10-year and both occurred at about the same time. While at yesterday’s lows, the SPX had retraced 75% of the rally from Wednesday’s low, the decline looks more corrective than impulsive while the just the opposite is true with regards to the rally. That said, a trade below 1045 prior to a trade above 1053 will invalidate that statement and the index closed at 1047. I think that those lows in the SPX as just as important as are the highs in bonds. If 1040 can’t hold, then I doubt we will see much in the way of a rally this side of the July 1^st lows at 1011 and ultimately, the case for 950 will be even stronger. The cycle stochastic on anything longer than a 15 minute chart would seem to favor the upside with the daily chart showing signs of a bullish divergence in the making but one good down day will erase that so my position is simply that the lows made on Wednesday need to hold if there is to be much of a chance for a rally. 

I haven’t addressed any markets other than stocks or bonds for a while now and that is because I’ve seen very little to talk about. The Dollar Index held at a necessary level early this month and has rallied nicely but not in a way that convinces me it is impulsing. The CRB index collapsed pretty hard from highs it had made early in the month, on the very day I wrote about how well it had performed amidst talk of deflation, but it hasn’t yet traded back through any previous swing lows. Gold has been grinding higher since the end of last month but is still shy of the all-time highs posted in June. I suspect that all of these markets along with stocks and bonds will be making loud statements soon but so far, I can’t hear a thing. 

8/26/10 – 8:15 – The 30’s closed down about 22 ticks yesterday while the 10’s gave back a little less than half a point. That’s not a bid deal given how far they’ve come and especially if you don’t consider that the 30’s closed nearly 2 points off their highs – the 10’s nearly a point off of theirs. But that already made yesterday’s break the largest pullback since the 7/27 and that was just in the first 5 hours. Never mind the fact that they’re both staging nice recoveries this morning, I think after a reversal like that, what they need is not to recover so much as to erase what happened yesterday. The fact is that there are so many features that come to mind following yesterday’s action that I don’t know where to begin. Maybe it should be with the fact that the low yield in the 10-year was at 2.419, a near miss of the bottom of the channel on the chart I posted yesterday at 2.411. Or maybe it should be the true outside down reversal in the 10-year futures with a close below the previous low, the first one of those since the day before the April bottom. Perhaps it would be the fact that now, the upside gaps on Tuesday appear to be textbook exhaustion gaps based on among other things the highest volume since late May. It could be that the lows of the day, after such a violent reversal, occurred right in Tuesday’s gaps or that because of that, a setup exists for an island reversal in the days ahead should the market weaken into a close and then gap down. How about the fact that the high tick yesterday in the 10-year futures was at 126-28 while a wave equality target based on the rally from the April low to the May high and measured from the June 3^rd low, was at 126-31+; in many respects that would be the highest tick one might expect if this were to prove to be a bear market rally (that is a miss of 2 ½ ticks on a move of 242 ticks) . Don’t forget about the timing for a reversal this week shown on Tuesday’s weekly chart or even the full moon yesterday. And while I’m at it, the low tick in the SPX, which came less than 10 minutes from the high tick in treasuries, was at 1039.83 vs. my 1040 targeted rally point that I suspected would bring calls for a ‘head and shoulders’ bottom although I haven’t heard any of those calls just yet. It was a day full of surprises, all of which were in some respects predictable.

Check out the chart of 30-year yield below and on the left. If you we writing a book about gap analysis you could use this as your illustration for the 3 most important types of gaps. There is the ‘breakaway’ gap in the first wave off of the yield crest at the end of July, a ‘runaway’ or ‘measuring’ gap in the middle of the third wave and what now may prove to be an ‘exhaustion’ gap in the 5^th wave. I’ve applied the standard retracement targets and the reason is to show how the 50% retracement is in the measuring gap, named that because they are found in the middle of moves and used to make a measurements for the end of the move. It’s just a classic. And if you Google ‘exhaustion gap’ what you will read is that they are characterized by extremely high volume. While the data for the yield chart does not include volume, beside it is the futures chart which does. You won’t see the gaps there since it includes 24 hour trading but just look at the volume.

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I’m going to dispense with my standard volume and cycle stochastic comments and let the day play out. What happens today and perhaps tomorrow can have enormous consequences going forward for both stocks and bonds. The truth is that while yesterday’s decline can be interpreted as impulsive in the 10-year, it is not perfectly just yet and from here the most important thing for me will be to see how they rally. The recovery high so far has been at 126-10 while a 50% retracement comes in at 126-11 and the pattern looks corrective but patterns on overnight sessions don’t matter much to me nor do the size of retracements in a 2^nd wave, the most bearish interpretation of where we would be. Selling against 126-08/11 would be the safe approach this morning while using 125-23 as a sell stop. The one thing I would want to avoid at any cost would be long exposure if the markets were to fade and close near yesterday’s lows since that would set up a potential downside gap and island reversal. By tomorrow, 125-17 on a closing basis will be huge as a close below there will produce a weekly downside reversal on a week where the bulls should not want to see a reversal.  

     
8/25/10 – 8:15 – At 8:30 yesterday morning it looked like the treasuries might be headed to the moon with another round of breakaway gaps below. By noon, they were trading down into their gaps and it looked more like they had seen exhaustion gaps and were about to finally produce a real reversal. The 30-year, which had rallied nearly 2 points in the first 2 hours, had given back more than a point by noon. But the bid returned and they managed to regain much of the early gains to finish with one of their best performances of the rally. While the moves weren’t quite as large, the action in the 10’s mimicked that of the 30’s. From the lows on Monday morning, where a correction may have ended, the rally looks to be an impulsive one that saw a 3^rd wave crest yesterday morning if you look at an hourly chart but if you go down to a 15 minute chart, it isn’t hard to make the case that a 5-wave move crested (see charts).

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That would mean that from yesterday’s high or any new high, still another impulse wave up will have completed. Several weeks ago I felt that the 10’s needed to print at least 1 more new high but very possibly several, separated by multi-day corrections, depending on how you counted out the waves from back in May. In some respects that is still the case but now, if that Fibonacci based timing pattern I showed yesterday on the weekly 10-year chart is going to work again, then there isn’t enough time left for another impulse. I’ll be the first to say that timing analysis like that is not the most dependable since it is based on a pattern that we all know will end – we just don’t know when. For this week, I would pay attention to the implications of any reversal and wait to see what develops.

The stocks began their day with downside gaps and while the SPX didn’t print that 1040 area that I felt could produce a nice rally, they did make it down to 1046 which is close enough to still hear the cry’s of a ‘head and shoulders’ bottom should we move higher from here. That said, they still closed sharply lower and there really is no reason to doubt that they are still in a down-trend. The Dow printed 9991 vs. their 1007 low on 7/20 before they bounced but there too the close was still sharply lower and offers no reason to get bullish. Something that got past me yesterday but I feel that I should mention anyway is that my TRIN system gave a sell signal on yesterday’s close. That closed out a long position that had produced a nice profit, with a loss if no money management was applied but the real point is the fact that the TRIN indicator gave a sell. The daily cycle stochastic is pointed lower and while it is oversold, it has pretty much negated the bullish divergence just as the hourly did on Monday. Volume expanded above what it was yesterday and the fact is that there is nothing much good technically with regards to stocks beyond the fact that both the Dow and the SPX at least bounced from near good support. They both still closed much lower and nothing is suggesting that there isn’t more selling to come. A gap above from 1063 to 1067 could help to create a bounce and above that is a trend-line near 1078 and absent a move through those levels I see no reason to think that the current lows hold.

Daily volume for treasuries was very high and beyond some wave interpretations – and that timing - I suppose that there isn’t much evidence supporting the notion that a top is near. But being a wave guy and being aware of the timing, I would pay special attention to several areas above if we were to make new highs and reverse. 2.411 in the 10-year cash places it on the lower boundary of a channel that has contained it since May while the 30’s touch a trend-line at 3.528, both levels very near yesterdays’ close. And I would be remiss if I didn’t point out that the cycle stochastic is just turning down from a high on a yield chart and that seems to suggest that there is still room to improve.

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Yesterday’s gap is the only support that really seems to matter and it’s a big one so we’re going to have to be very careful in here to avoid taking on a lot of risk to make sure a high is not being made. I’d like to sell against that channel line in cash but this is a tricky one as my wave work might suggest a sell and the timing - while very undependable - might suggest a sell but the above chart with that cycle stochastic suggest anything but a sell and the trend is still clearly up. I can’t recall a time when the placement of a sell stop was more challenging. I’ve always felt that from the top of a gap to the bottom is all about the same with regards to support so if you let a market enter a gap, you need to be prepared to let it fill the gap. That would seem to suggest that if you want to withstand a trade below 126-04+, you need be able to withstand one below 125-24+. I see a minor support level at 126-08 so if you want to protect profits you might use 07 as at least a partial stop but until the 10’s trade at 125-23+ buyers could emerge at any time.

The stocks sold off into the close yesterday after having posted the high of the day in the first half hour and that’s never a good thing. The high on the SPX was at 1081.55, within my expected range for a corrective rally target at 1080/85 and that chart begged to be sold at the close. The hourly cycle stochastic on the SPX had moved all the way back down to oversold yesterday eliminating the bullish divergence there as any sort of supporting evidence. The daily stochastic moved down and with a lower close today, will likely wipe out that developing bullish divergence. If the stocks do have another sharp decline in them, I couldn’t paint a better picture for how it would start than with a gap down from yesterday’s negative looking daily bar. Basis the futures, the SPX would be at about 1057 right now, right up against the 7/20 swing low which is likely to be the final support area this side of 1040 so if there is not a recovery in the next hour or so, this could prove to be a very ugly day for stocks. Remember that the area of 1040 shows up as great support and if it holds, it will create what will appear to be an inverted ‘head and shoulders’ bottom but my wave analysis tells me that targets near 950 are still very valid.  

Treasuries have been very strong of late with few if any pullbacks of any significance. That paints a picture of a market that can be overextended but trying to pick a top can be very expensive. I will continue to search for a new high across the curve followed by an impulse to the downside but having said that, I noticed something worth mentioned when I looked at my weekly chart last night. It turns out that this is a very interesting week from the standpoint of a well-timed trend change using Fibonacci numbers. This may sound thick at first but try to wade through it as I think it will be worth it and have included a chart to show what I am seeing. This is the 8^th week from the yield trough made during the week of 7/02, the 13^th week from the trough of 5/28, the 34^th week from the yield crest the first week of January and the 55^th week from the yield crest the week of August 7^th of last year. Those are all Fibonacci numbers, the only one missing being the 21^st week which missed the April yield crest by just a single week and in fact, the all-time yield trough came 88 weeks ago, just one week shy of the next Fibonacci number, 89. That is a fairly amazing run of hits although as I always like to remind myself and others, patterns like these are beautiful things to watch and possibly even trade but you must remain aware of the fact that they don’t work forever. That having been said, until this one interrupts, it is a difficult thing to ignore. The chart below shows this picture with the Fib. numbered weeks plotted in colors and remember, I didn’t leave any out which is what makes it so compelling. The sequence beginning with 8, which is where I started this count, goes 8, 13, 21, 34, 55 and 89. And there are several other compelling counts that you can make on this same chart. For instance, from the January yield crest colored here in magenta, you can count backwards 13 weeks and you get the large tough in October and you can also count backwards from the crest in August of 2009, the black bar, and see that the June 2009 crest was 8 weeks before that. It’s all just really interesting – until it works again in real time and then it becomes amazing.

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I’m expecting to see new highs across the curve today and if that happens, any reversal to a lower close today or any other day will be huge. There will be an opening gap down to 125-24 so a trade below there will be a signal to stand aside. If it comes following a trade above 126-08 it will be all the more negative. As far as a sell area goes, I would look to my next intermediate resistance at 126-21/22 but if stocks continue to make new lows, I would be in no hurry to sell and would probably want to follow the market up with about a 10-tick stop.

 8/23/10 – 8:15 – I looked at my screens last night for the first time since Thursday afternoon and not much had changed. The 10’s, which didn’t make new highs during Thursday’s rally leaving them in what could have been a B-wave, softened on Friday making that the most likely count. The 30’s, however, had made clear new highs on Thursday suggesting they were in an impulse and that still may be the case since at Friday’s lows, they had only retraced about 58% of Thursday’s move. It’s going to take a little more time for me to make a call but not much since just a normal range day in either the 10’s or the 30’s should allow me to eliminate one or the other of those 2 counts. Volume was quite a bit higher during Thursday’s rally than it was during Friday’s break so that seems to be a positive while I’m seeing nothing from the open interest. There’s already so much switching from the September to the December contract as to make the analysis tricky if you don’t look at both contracts but since 8/11, the open interest on the September contract has dropped 195,000 contracts while during the same stretch, the December had increased 200,000 and truthfully, the market has basically gone sideways during that time frame. My cycle stochastic is oversold on both the hourly and the daily chart suggesting another rally may be about to unfold and that would really help the wave analysis since I always prefer the 10’s and 30’s to be in sync and the best way for that to happen would be for the 10’s to make a new high. The weekly cycle stochastic closed out heading down and that is a concern since if new highs are going to come in the current impulse, I’d surely like to see the rally commence before the 10’s give up too much ground.

The SPX made a new low on Friday, pretty much eliminating the B-wave possibility that I mentioned on Thursday and leaving it with what can well be a 5-wave break from the highs on Tuesday. If that count proves correct, I would not expect to see much more than 1080/85 on the upside before they take it on the chin again and I still think that the next solid support area is 1040. Volume was not as high on Friday as it was on Thursday but it was still greater than on any of the recent rally days and that still seems to paint a negative picture for stocks. One thing I do see on my SPX charts is an hourly stochastic that is rising and just becoming overbought but with a nice bullish divergence at Friday’s lows. There hasn’t been one of those in a while and I’ll be interested to see if that could be an early warning sign that my more bearish wave count is incorrect. There is also a bearish divergence on the daily chart, the first there in quite a while as well, but that one is not yet confirmed and could vanish if the market breaks today or tomorrow. I’ve included both charts below, first the hourly and then the daily.

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That’s about it for now. Maybe today will help clear up the wave count in the treasuries and while the wave count for stocks looks perfectly clear to me already, you never know when they are going to fail you and those stochastics are what has my attention for now. For the day in the 10-year, I would use 125-03 as my stop on any longs but I will also be watching the gap in cash at 2.668/686 for support. I think using a stop that close will allow for no sell area at all since if the support holds, I will be looking for new highs.

8/20/10 – 8:15 – I’ll be away from the office all day tomorrow which is why I’ve sent this update out today. The bonds started off weak on selling probably initiated by sell stops being placed just below that 3-day triple bottom and up-trend line at 125-17+/18, but they began to recover on a soft Claims number and caught fire following the Philly Fed number at 10:00. No question but that the stock market, which was under pressure until noon, contributed to the rally. The quick recovery from the lows suggests that a correction that began on Monday, probably ended. That would be a 4^th wave correction and we would now be in the 5^th. An intra-day chart shows what could be an impulse up from the low this morning followed by a correction for much of the last half of the day. That would represent waves 1 and 2 of the 5^th wave suggesting a high no earlier than next week. If that transpired, it would represent the end of the move from the 28^th but just what that would prove to be is still debatable. I could still make a case that the correction is ongoing since the 10’s never made a new high but that’s not true for the 30’s, not even close. They far outpaced the 10’s, collapsing that spread to near 108 bps from the extreme set on 8/10 near 125. The last time the spread was here was around the 1^st of the month when the 10’s were trading 2½ points lower than where they are now. I hate to harp on this but from June of 2009 until April of 2010 the 5-year was the strongest of the issues I watch while from April until the August it was the 10’s that led the way. Now it is the 30’s and we continue to make new highs. When the 30’s are no longer leading will we be looking for a leader in the other direction? Only the Shadow knows.

The SPX softened on the jobless claims numbers and then got hammered on the Philly Fed numbers. Now the notion that the move up off of the 7/01 lows was a C-wave wedge leaving targets in the 950 area is suddenly not so far-fetched. And if that beautiful wedge weren’t enough evidence that stocks could be in trouble, then the apparent 5-wave decline into the lows on 8/16 followed by a rally that retraced 51.3% of the break prior to yesterday’s sell-off just might be. Daily stochastics may be suggesting an impending low but not so for the weekly so I would say that stocks are still very much at risk for more downside. One potential positive that could develop comes from the fact that there should be great support in the SPX at 1040 based on a low back in February as well as lows in late May and early June. I would expect to see some buying there, presuming it gets tested, and if that were to occur you can bet you’ll be hearing prognostications for a rally based on an inverted ‘head and shoulders’ pattern from May forward that would appear to be potentially valid. I would rely much more on my wave counts than I would on any ‘head and shoulders’ pattern but as they say, bull markets die hard and that pattern is one of the more popular of all technical patterns. Even if it weren’t a bottom, it could create a nice rally. Since I rely so heavily on Elliott Wave theory and since neither the SPX nor the Dow made new lows below those established on Monday, I can’t rule out that this current break may have been a B-wave meaning the stocks will return to the highs from earlier in the week but that’s about as good as I think they can do. A clean break of Monday’s lows will put 1040 in the crosshairs and quickly. I can’t help but think back to something I noticed and commented on a few days ago; that being the fact that the last time the 10-year saw yields that are now being printed the SPX was in the 750 area. If the stocks were to continue to trade lower, one does have to wonder where the top of the bond market might really be.

 I want to show you 2 charts of the cash 10-year, one a weekly and the other a daily. On both I have placed my cycle stochastic as well as a traditional stochastic. The first one is the daily and what I am struck by is just how different the two oscillators look. The regular one located at the bottom reflects a market that it well oversold (yields) and showing divergences suggesting a reversal is imminent but as you can see, it has been that way since last week. The cycle stochastic above it is remarkably close to overbought and while it does cycle very quickly, it is still telling me much the same thing as my wave analysis; that being that a high is not in place just yet.

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This next chart is the weekly and there, the 2 oscillators, while very different over the past year, are much the same currently. They are both very oversold, as much so as at any time since the all-time yield trough from 2008. It doesn’t take all that much for the cycle stochastic to turn back up as is evidenced by the many cycles it has gone through just on this chart so that tells me that a weekly low is likely very soon. Will the next up-cycle carry the regular stochastic with it? If so, it might represent a real turn.

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I do not have a good opinion of what tomorrow will bring partly due to the fact that the 30’s made a clear new high while the 10’s didn’t. For now I see no evidence that the rally has ended, in fact I see ample wave evidence that it has not. Still, from these levels the treasuries are very dependent on the stocks, I think, and both may have only finished B-waves since neither the stocks nor the 10’s broke through previous extremes. If the stocks bounce then I would expect to see the bonds take a breather but if the stocks get hit again, treasuries should be the benefactor. I see stocks headed lower with or without a bounce first and the opposite is true for bonds but we may need to wait until next week to see it happen.

 Since I don’t know how the markets will open, the strategy is a little more challenging than usual but I can’t see using a stop any lower than 125-16+ while looking to sell against 126-07. Should the 10’s open above 126-07, I would look to sell my next resistance at 126-21/22 or simply work with a 10-tick stop.

  
8/19/10 – 8:15 – Some weakness has entered the markets overnight and we probably shouldn’t be too surprised. Both the 10’s and the 30’s closed on their lows yesterday, the 10-year closing lower after failing to make a new high while the 30-year made a new high but failed to close lower so neither market actually produced a true reversal. Still, the 10’s looked menacing on the close since much like on Tuesday, they were threatening to break below an up-trend line drawn under all of the action since the 7/27 low. True, it is a very steep trend-line due to the nature of the rally but that is the very reason why any correction can prove to be violent. Since the overnight low on 7/27 at 122-08+, the 10’s have not made lower or even matching lows on consecutive days but as of yesterday, the low ticks for the past 3 days have been 125-17+, 125-17+ and 125-18. That may not have changed the pattern but it likely attracted a significant number of sell-stops just below those levels and without news to feed of off, markets tend to search out orders so trades below 125-17+ looked more and more likely late yesterday and especially after the close. Meanwhile, the value of that up-trend line that I showed on the chart in yesterday’s update had reached 125-18+ today so there was no more time to test these lows without breaking the trend-line. That tells me that absent any real bullish surprises from this morning’s numbers, we should be entering into a correction of some degree, perhaps a substantial one. The 30-year, by virtue of having made a new high in the morning and then closing on its’ lows, actually had a decidedly more negative look to it although I always avoid the temptation to call anything a downside reversal that doesn’t at least produce a lower close. But with the weakness this morning, the 30’s appear to be set to gap down and without a recovery, that will simply enhance the negative look from yesterday’s highs. They still have a large gap below to provide support but now, that upside gap from Monday is beginning to look like it really may have been of the ‘exhaustion’ variety. The equivalent trend-line to the one that the 10’s appear to about to gap over is still about 2 points away in the 30’s. Yesterday morning, from about the same level, it felt like the market should rally based on the up-trend line, the fact that the low of the day had barely filled a gap in futures and not in cash, and the oversold condition of the cycle stochastic. This morning the same chart shows the trend-line to be broken, the rally off of the gap to have failed and the cycle stochastic to have cycled back up to overbought and on its’ way back down. The implications were just the opposite.

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The daily cycle stochastic is pointing down from a bearish divergence at the highs on Monday but it has already dropped to a reading of just 25 which is approaching oversold. One of the reasons I like that indicator is that it is quick to react to a move in the market. The more traditional stochastic is only just beginning to roll over from having been overbought since the first of the month. It will be interesting to see how those 2 indicators perform during these next few days.

 <chart>

 
The SPX opened about unchanged yesterday and then traded about 7 points lower on the day before rallying to trade about 7 points higher on the day before closing near unchanged. I had said yesterday that the SPX needed to clear 1107 on the upside or 1082 on the downside to make any sort of statement and that is still the case. I think the patterns look a little more bullish than bearish but I will still wait for a break of either end of that range before making any bold predictions.

8/18/10 – 8:15 – What a difference a day makes. Two days ago you could have sold 30-year bonds to a money market account and yesterday they were giving them away. This morning they’re on fire once again. The 30’s were up nearly 2 points on Monday, gave back about half of the gains yesterday and are trading up ¾‘s of a point in pre-market. The 10’s just about wiped out all of Monday’s gains yesterday and are up 8 ticks this morning. With the pickup in volatility and from such lofty levels, every time you see a break like yesterdays’ you have to wonder if the rally might have run its’ course. I still see no reason to think that it has though and suspect that the 10’s might have entered into a 4^th wave correction of the move that began on the 28^th of July. No guarantees though, not in this market, but any evidence that the move is over is scarce. At the lows yesterday, the 10-year futures filled their gap by just 2 ticks while the cash entered its’ gap but failed to fill it. The 30’s, by virtue of having rallied much further on Monday, still have most of theirs to deal with as well. A downside gap this morning would have left an island and a real scare since the treasuries closed at their lows yesterday but instead, it’s another upside gap that we have to deal with. It will take more than one bad day to destroy the bullish look to these charts.  

The SPX was a little more predictable with its’ rally yesterday and while it overcame the downside gap left on Thursday, it stalled right up against the 50% correction of the decline out of the high on the 9^th and is now in a position to ‘make it or break it’ with regards to the next big move. I could tolerate a push up to about 1106 but not much further if I were short. When I run through the litany of indicators at my disposal, I can find some reasons to think the rally extends but the wave patterns are not among them. It still looks to me like they’ve come down in a 5-wave move so until I see some evidence of an impulsive rally, I can’t get too excited. Not that they might not be impulsing up right now but it is just too soon to tell. They do appear to have bounced off the lower end of a Bollinger Band which is a fairly widely watched indicator while the stochastic, both the traditional one and my preferred cycle stochastic, turned up from oversold although without any divergence. This is all suggestive of a further rally and if it can just go another 7 or 8 points, then stocks would appear to be out of the woods for now but until that happens, I wouldn’t get too careless. This morning, much like on Monday, despite what one might think when they see the strong bid for bonds, the stocks are pretty much flat. Considering the size of the rally yesterday, volume was pretty disappointing and that too has me concerned. Let’s give this one a day and see how things play out. A trade at 1107 would clear me out of any shorts while it will now take a break back under 1082 to turn things back down. The TRIN system remains long.

 Yesterday I posted a weekly and a monthly chart that I felt was a good way to put the entire move into some perspective. That said, if I didn’t do my analysis on intra-day charts there wouldn’t be much to write about. I keep mentioning an impulse that began on the 28^th of June and I’m posting an hourly chart that shows that entire move. You’ll see that I’ve included the cycle stochastic at the bottom which is oversold and I’ve drawn a trend-line that has contained the entire rally but one that was being tested all afternoon yesterday. 

I’m not sure about the wave count but if the oversold stochastics coupled with the trend-line and the fact that the futures just barely filled a gap yesterday while the cash still has one to deal with, if those 3 things could not conspire to create a rally, then I would have to say that the impulse from the 28^th is done. That would leave the door open for still another push up but reading the structure of the decline would then become very important to me. Once we break to the downside, I’ll be posting targets but I can already tell you that the remaining gaps in the 10-year cash as well as on both 30-year charts will be prime candidates for the next swing low.

Once this current impulse wave ends, my concern will be over whether or not the entire rally has ended. There are, I believe, several valid ways to count the rally but I thought I would go ahead and post one more chart of the 10-year with what would be the ‘worst-case-scenario’ plotted on it. It isn’t a prediction so much as a possibility to be aware of. I left the trend-line from the hourly chart on it just for perspective and have included the potentially bearish count from the April bottom. The larger red numbers show the larger degree waves while the smaller black numbers show the internal waves. It really isn’t a classic picture of an impulse wave since the book teaches that the third wave in any sequence is usually the strongest of the 3 impulses in a 5-wave sequence and in this case, that would clearly not be the case but the only requirement is that the 3^rd wave not be the smallest and that one has been met as long as the move out of the 28^th does not exceed 127-04+. At that point, this particular count can be eliminated.

I continue to think there may be something to the fact that from the yield crest in June of 2009, the rally was led by the short end of the curve while from the crest in April of this year the 10’s led the move and now it is the 30’s which are tightening for the 6^th consecutive day, the longest winning streak since back in May. Typically, a rally comes to an end when late-comers get left holding the bag. In this case, if the rally ends anytime soon, those ‘bag-holders’ might find themselves stuck in the worst possible instrument, the 30-year bond. That’s just an observation though, for now those who are long the 30’s will be making the most money when the markets open this morning. I would either look to sell on a trade back at 126-07+ this morning or following such a trade, place a stop at 125-27 and hope for a push on up to 126-18. As far as a sell stop goes, the trend-line drawn on the hourly chart above has reached 125-12+ today so I would keep a stop at 125-11 for longs although I wouldn’t be too quick to get short this market. There will be plenty of time for that later on.

8/17/10 – 8:15 – What a powerful day in the treasury markets – especially the long end of the curve. The 30’s closed up nearly 2 points while the 10’s gained about 20 ticks sending both to yields not seen since Spring 2009. The last time that the 10-year traded yields this low, the SPX was trading at 766. The opening gaps were never tested and are huge on both daily and weekly charts. The 10-year has now retraced nearly 73% of the entire run-up in rates since the 2.03 print in December of 2008 although the 30-year is not even back to its’ 50% correction, a level that might merit watching at 3.689. While I’ve been trying to determine the wave placement using daily and even intra-day charts, a weekly chart gives the appearance of a market that is in the 3^rd wave of a move that began on 7/13 which could be part of a larger 3^rd wave that began on 6/03 leaving me to wonder if I may have been guilty of not seeing the forest for the trees by using those shorter duration charts. Just take a look at these 2 perspectives of the 10-year as presented by a weekly and a monthly chart, uncluttered by any indicators. I’m reminded of a line from a Bob Dylan song: You don’t need a Weatherman to know which way the wind blows.

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 One of the more amazing things about yesterday’s move in bonds is that it needed no help from the stocks which traded in a quiet range. They did make new lows of the move early before recovering to close about unchanged. It makes you wonder where the bonds might have gone if the stocks had sold off. We may still find that out. The SPX never did manage any sort of rally above where they had closed on Friday and that leaves them with a gap to be filled at 1088.55 left from last week. I think there are 5-waves down in the SPX from the highs of last week and if so, then a recovery back into the 1092 to 1100 area would seem likely but unless things change, I’m expecting a secondary sell-off from there so from that perspective, that gap doesn’t seem to make that much difference.

 Over the years I’ve learned many tricks to help find support and resistance but I have to admit that it is getting exceedingly difficult to identify solid resistance, especially in the 10-year futures which have been trading in uncharted territory since June. Another day like today and I’m not sure that there will be any. I always fall back on wave patterns to get a feel for whether or not I should even be looking for a high or a low and while lately I have been expecting to see at least a minor impulse from the 28^th of last month come to an end, more bullish interpretations keep developing. The truth is that the rally seems to be gaining momentum which suggests that it is still somewhere in a 3^rd wave and likely not to come to an end without another correction followed by an extension. Aside from wave analysis which will always be my fall-back, there has also been a lot written about gap analysis and looking at yesterday’s gap several thoughts come to mind. There are such things as ‘common gaps’ and ‘breakaway gaps’ but those occur relatively early in moves when markets have been in trading ranges and that doesn’t apply here. There are two types of gaps that might apply, however, and they are ‘measuring or runaway gaps’ and ‘exhaustion gaps’. The former occurs near the middle of a burst which in this case would suggest a move to somewhere near 2.13 - plus or minus - and those types of gaps are typically left unfilled as the move progresses. The ‘exhaustion gap’ occurs near the very end of a move when investors who have waited for an entry finally just give in and chase the market up. In that scenario, it should become obvious very soon as the market should reject the new levels rather quickly, fill the gap and continue to move away from the new extreme. Either of those types of gaps are typically accompanied by extreme volume though and that just wasn’t the case yesterday so it remains to be seen what they really were.

8/16/10 – 8:15 – Powerful upside gaps will have the treasuries opening in new high ground this morning and for the first time, that will include the cash long-bond as the 30-year futures are up a full point in overnight trading. I don’t mean to obsess about the yield curve but on Friday the treasuries all closed higher and yet the 30-year/10-year spread tightened again and it is doing so again this morning. Since Tuesday, that spread has come in 6.7 bps (excluding this morning) which is the most it has flattened since 5/06 when the 10’s closed just under 3.40. If we have seen the extreme of that spread, it will have been at a record extreme and I would imagine that the top of the market may not be far off – may being the key word in that sentence. On Friday, the cash 30-year had come within 4 bps of the extreme it hit on 7/01 but that area will be taken out in spades this morning which will finally make the pattern there agree better with the patterns in the 10’s and even in the 30-year futures. I have been expecting to see the 10’s make at least one more new high in order to potentially complete the impulse from 7/28 (I’ll address that with a chart in a moment) but now that the 30’s are about to clear their 7/21 yield trough, they look as though they may need another pull-back and new high to complete that same move suggesting another week before this phase of the rally would be over. The one thing that I would be concerned with today will be the giant gap that will be left on the opening in the 30-year. Exhaustion gaps are not an uncommon way to see an extended rally come to an end. Of course for that to happen, we would need to see a failure accompanied by a close near the low of the day and if that close was still higher than Friday’s, then we would need to see a lower opening and follow-through tomorrow. For now, that may not seem likely but it is probably worth keeping in mind since on Friday afternoon, it didn’t really seem likely that the 30’s would opening a point higher today.

 The SPX closed lower on Friday and with the high of the day a bit lower than it was on Thursday, there remains a downside gap that really needs to be filled if that chart isn’t going to look even worse than it did following the debacle that was Wednesday. The daily cycle stochastic is oversold and that tells me some sort of a recovery is likely in the next several days but the disturbing thing is that the weekly has turned down. In the past, that indicator on the weekly chart has turned down and then hooked back up one more time but in every instance, a top came very quickly if it wasn’t already in place. More often there was never another hook to the upside as you can see in this chart. This is not a normal stochastic and you will not likely see one that looks like this on any other chart.

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 I think it’s important for the stocks to hold if the bonds aren’t going to keep right on rallying. That weekly chart, coupled with the daily chart that shows a potential C-wave wedge off the bottom and the intra-day chart that shows a potential 5-wave decline has me thinking that stocks could have quite a bit of downside left in them.

 Everything about the chart of the 10-year has been suggesting still higher highs although the cycle stochastic is now showing bearish divergence beginning on the 9^th. For now though, I want to stay focused on the wave structure. I’m posting a chart here that may be a little confusing to you as it shows the very thing that has me confused as well. This is my yield chart of the 10’s and I have placed a large black ‘X’ where I think a secondary impulse wave began. I have counted in red on the chart where I think waves 1, 2 and 3 ended with the yield trough for wave-3 having been on July 1^st.  In addition, I’ve counted in magenta what I believe are waves 1, 2 and 3 of the minor impulse that began on July 28^th. But as you can see, I have 2 different possible end points for my 4^th wave, shown in red with a ‘question mark’ after each. Once we make a new low yield which will likely occur this morning, I will call that a 5^th wave from 7/28 but if the 4^th wave crested at my first ‘4?’ which was on 7/13, then there should be another 4-6 day correction followed by a new low yield while if the 4^th wave ended on the second ‘4?’, the rally could be over with this new low yield. The chart also has the cycle stochastic on it showing the bearish divergence circled at the bottom.

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8/13/10 – 8:15 – More curve flattening and a lower close in the 10’s. It may well be that the curve trade will be nothing more than a directional trade in the 10-year since most of the steepening occurred during the rally but I still think we should keep tabs on it. The 10-year, after making a new high of the move, traded down into the gap it left a day earlier but failed by a tick to fill it and that stands as an important level below; the gap now being 125-05/06. For now, a trade below 125-05 would suggest to me that a high of some degree is in place but until structure or price tells me otherwise, I’ll treat it is only a temporary high and look for short correction into next week with objectives near 124-12/14 and possibly closer to 124-00. Equivalent targets in cash are near 2.827 and again near 2.872. Absent some further clues, only a trade below 123-16 would give me cause to think there are not still higher highs to be seen.

 The stocks had another down day and while they recovered to close better than where they had opened, they still broke through a wave-equality target that should have held if this were a simple correction leaving me to suspect there may still be a lot of downside left. If the pattern off the bottom was a wedge, then it was a C-wave and that means the lows won’t hold and longer-term targets show up in the 950 area. I’m not there yet but that remains a distinct possibility. Volume during the big break on Tuesday wasn’t huge but it was still the highest in the S&P futures since the July 1^st bottom. Yesterday the volume was obviously not as high as it was on Tuesday but still it was higher than any of the rally days since 7/20. The cycle stochastic reached into oversold territory and if you’ve looked at the charts that I have posted recently with it applied, you may have noticed that it doesn’t stay overbought or oversold for long, it cycles very quickly. It hasn’t hooked up yet but if it does, then a corrective rally should be in the works. No sell yet on the TRIN system which is rather odd. Had you been playing that system, money management might have taken you out but so far, no sell signals based on the TRIN have been generated. When I look at an intra-day chart of the SPX, I see a 5-wave decline and if that proves to be correct, then there will be another to follow even if we firm up further from yesterday’s lows.

Turning back to the treasury markets, volume yesterday was high but not as high as it was on either Tuesday or Wednesday when the bulk of the recent gains were made. If the 10’s continue to trade off and volume continues to deteriorate, that will be more evidence that the highs have not yet been seen. Open interest expanded throughout the late stages of the rally, enough to create some vulnerability but that is still a bullish pattern. The cycle stochastics turned down from overbought and if that isn’t reversed today it will be a good indication that yesterday’s highs will hold for several more days but not to be ignored is that fact that last week the 10’s closed at 124-18+ and it’s never a good idea to fight a weekly close in a trending market. The close last week in cash was at 2.824 and that represented the best weekly close since March of 2009. The wave structure of the rally is such that it is not entirely clear to me just where we are but it does seem clear that the most recent leg that began on 8/04 is a 3^rd wave and that is why I believe there needs to be at least one solid correction before a top can be made. Only an impulsive structure to the downside will give me any real cause for concern.

 One treasury chart that can be suggesting a top of some degree is the chart of the 30-year futures posted below. It shows a clear bearish divergence at the highs yesterday on the cycle stochastic and when you couple that with the fact that the cash 30-year has failed to make it back to the best levels it hit 6 weeks ago it seems to suggest some lost momentum but that divergence can be eliminated with a higher close today so for now it is nothing more than a warning sign. As long as the treasuries continue to make higher highs and higher lows there is no reason for worry but with the strength of the past several weeks, the last swing low is a long way down, too far away to see if it holds while you’re long. 

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If the 10’s close lower today, I would assume that the high made yesterday was the top of a 3^rd wave out of the low on 7/28. It isn’t all that clear on the futures chart but it is clearly the best count for the cash chart and the one I would go with. If that count is correct, then the decline should be a 3 and the objectives, as mentioned above, are best at about 124-14 and again near 124. The truth is that as strong as the market has been of late, it seems foolish to call yesterday the top of anything but again, I’m not looking for a top so much as an interim high. The overhead trend-line I have been using for my resistance has made it up to 125-28 so I am including it in a relatively large band of resistance extending up to 126-02+ and that band would be my sell target for today. 125-04 is clearly the best stop as far as I am concerned. It’s Friday the 13^th, a fine day for something.

 
8/12/10 – 8:15 – Finally some curve flattening. The 30-year was up about 1½ points yesterday vs. about 20 ticks for the 10-year and this morning there is a little more flattening going on with both markets off a bit. The bulk of the recent steepening began with on May 6^th which remains the largest up-day during the entire rally so finding the peak of the spread might mean you’ve also found the top of the market. One day of flattening doesn’t mean it’s over but I think we really do want to watch that spread relationship. The cash long bond still lags the rest of the instruments that I watch and remains 10 bps from the July 1^st yield trough. As far as my other treasury charts go, it was just more of the same with new highs posted across the curve following upside gaps. Looking at the high of the day in the 10-year futures, I can’t help but think somebody is actually using my resistance levels. If you’ve followed the 10’s lately and kept an eye on the levels that I post, you may have noticed the same thing that I have. Despite the incredible strength that we have seen in the 10’s as well as what have been some very important news days, the intermediate resistance levels I’m posting are working with remarkable accuracy. Looking back at just the intermediate numbers I’ve published in this report starting on the 3rd of the month, I had levels in the 10's at 124-04/08 adjusted to 05/08 on the 4^th, followed by 124-23+, followed by a number derived from an overhead trend-line which reached 125-07 on Tuesday, followed by 125-19+/22. The highs since the 3rd have been at 124-05+ and 124-08, followed by a one day pullback on the 5^th and then a high at 124-22+ on unemployment Friday, 124-24 on Monday, 125-07 on Tuesday and 125-21+ yesterday. The overnight high for today stands at 125-21. Each resistance area has worked nearly to the tick even if all that it did was to produce a high for that day. Some of these levels are fairly obvious while others are more esoteric with regards to how I am identifying them but still, each one has had its’ impact. The question that comes to my mind is ‘what happens when there is no more good resistance’ - and that day may come sooner than you think. Of course there’s always cash as well as the 30-year but those 10-year futures have really been amazing.

 While the announcement that the Fed would be purchasing treasuries gave the markets a boost on Tuesday, much of the gains yesterday were likely the product of a weakening stock market. If the rally off of the July 1^st low was a wedge, then it is over and stocks are headed quite a bit lower right away. Once 1086 gives way, the SPX could find support at any of several levels, most notably near 1065, 1056 and 1040/44 but not one of those levels is likely to result in a bottom in my opinion, only a bounce. Ever since the top in April, the volume has been greater on the downside than the upside and that’s been especially true for the past several weeks. I had wave-based objectives that were never met and that itself is a sign of weakness. There have always been some internal issues with the market based on the indicators that I watch even though the TRIN system I keep running did get fully long and while it had built up some nice profits, as of yesterday they had evaporated and turned into losses. Yesterday’s low was 1088 so maybe it can recover once again but 1086 would be my uncle point and that level will likely be tested this morning.

 The Dollar Index had a nice move up yesterday following a low of the move on Monday at 80.26, still above my final support area of 79.72. It’s too soon to call that anything other than an interim low but that can change and I’ll keep an eye on it. Meanwhile, another market that I had mentioned recently is the CRB index and it has done nothing but get clobbered since the day I posted the chart of it. The rally high was at 280.69 coming off of a low in April right on the 50% retracement of the rally from March of 2009 to January of 2010. That low made the prospects for really strong rally look pretty good but in all honesty, the move out of it, while quite impressive, does not look impulsive and thus, is not convincing to me.

 With each day up in the 10-year, my objectives move high and higher since I don’t think that the move will end prior to a correction and another new high and at least through yesterday, the correction hadn’t begun. I suspect it will soon though. I had mentioned last week that I couldn’t see how the rally could complete for several more weeks and not likely ‘this side of 2.70’. Well, we hit 2.683 yesterday so maybe price is beginning to get to where it needs to but the Fat Lady hasn’t sung yet or at least I haven’t heard her. One of the sources of my 125-19+/22 resistance level yesterday was another overhead trend-line whose value has made it to 125-25 today so that has to be my target for today but following some overnight weakness, we may need to see new lows in the stocks to have a shot at it. If that can be overcome, next stop should be 125-31+ to 02+ before I run out of nearby intermediate resistance altogether. Should we get the anticipated pullback, I hope to be able to come up with further targets but for now, those are them as far as futures are concerned and that seems to be what is working the best. As far as the downside goes, with things as frothy as they have become, I would play things close to the vest in here and use a trade below yesterday’s gap at 125-04 as a trigger to exit longs for the day.

 
8/11/10 – 8:15 – Following a first half of the day yesterday that rivaled Monday as far as dull goes, the FOMC news came out and sent the 10-year soaring once again. The 2 previous day session highs were at 124-22 while there was solid support at 124-22+ and then yesterday when the news hit, the 10’s exploded off of a low at 124-13 and 20 minutes later they hit 125-05; the eventual high coming right at an overhead channel line at 125-07 mentioned in yesterdays’ update. The wave structure had suggested an explosive move was coming and explode it did and the wave structure continues to call for higher highs even if that does seem to be more difficult to swallow with each new handle. But this morning they are up again and above the highs made yesterday. I don’t see how a top can be made prior to at least a 3-5 day correction from a high of the move with a new high to follow that and even then, there would be no certainty that the entire sequence was done. I do think that the 10’s are well into a 5^th wave from April but it is extending and until I see a completed 5-wave rally from any low followed by an impulse down it will be hard for me to make a case for the rally to be over. But while I still see higher highs coming based on the 10-year, I also continue to be confused by much of what I am seeing elsewhere. Recently I have mentioned a lot about the 30-year vs. 10-year spread which had made an all-time high near 113 bps just a week or so ago and yesterday it closed at about 125 bps. I’ve addressed the fact that a front month futures contract of the 10-year is now trading nearly 5 points above where it was trading when the yield on the 10-year was 2.03 back in December of 2008. I’m sure that there are explanations for both of these things but I still find them very odd. Then yesterday following the late day explosion which carried the 30-year futures up 1¼ points in just 20 minutes, they gave back all but 7 ticks in the next 25 minutes. That alone isn’t really all that strange and if fact, the impetus for the rally came when the Fed announced they would be buying long-dated treasuries. If what they were going to buy was more of the 10-year and in variety, that would explain why the 10’s held up better than the 30’s but it wouldn’t explain the fact that at 3:00, those 30-year futures were still up half a point while the cash 30-year was lower on the day, trading more than 2 bps worse than where it had closed on Monday. I had mentioned a few days ago that the 30-year futures still looked constructive but that the cash chart didn’t but I would never have imagined that you could have bought the futures and sold the cash and come out so well. In fact, the cash 30-year finished with an outside down reversal and now looks even worse than it did when I initially made that statement. So what I’m left with is the opinion that the 10’s are likely to keep going up while the 30’s appear more than ever likely to head the opposite direction. While the spread between the 2 might be at the widest it has ever been, it got that way as the 10’s outperformed the 30’s during the rally. I don’t think those 2 markets are going to head in 2 different directions so I’m having trouble making a call with much confidence. I’ll stick with my positive outlook based on the 10’s since they are my market of choice for wave work but I’m still concerned about the implications of that 30-year chart.

And while the treasuries were doing their thing, the SPX, which had opened lower and traded down to 1111 which was 16 points lower on the day, recovered all of its’ losses following the FOMC news before giving back about 7 points into the close. While the Fed gave investors little reason to be bullish on the economy, stocks still held up well and at the close, they still looked as though they were headed higher. Not so much so this morning, however, as they are back down below yesterdays’ lows in overnight trading. My first objectives were still 13 points above the best levels achieved yesterday but now they are going to have to prove themselves once again or that potentially negative wedge pattern that I showed last week may override everything else. On Friday the SPX bounced off of the up-trend line that defined the wedge although the Dow stayed well above the equivalent. Yesterday the line gave way in the SPX but held almost to the tick in the Dow. Once it gives way, which could occur this morning, things won’t look so good.

While I only look at technicals, collectively the markets seem to be suggesting that the ‘double-dip’ in the economy that some have suggested, could become a reality. The shorter end of the treasury curve that I watch, measured by the 5-year, is showing no signs that it isn’t headed back to the extreme seen in December of 2008 and with the still friendly wave patterns, I have to expect continued strength. The intermediate resistance levels that I’ve isolated have worked really well as far as day-to-day risk management and the next area I see is at 125-19+/22 so I’ll make that my ‘sell area’ for today and while I don’t see a top coming right away, with all of the increased volatility I would want to work with a fairly tight stop on longs. An opening gap will get filled at 125-07 but that may be a little too tight so I would go with a trade below 125 for today.

Yesterday I posted some monthly charts of the treasuries to show how much different the various maturities looked over the long-term. Below are daily charts of the 10’s and the 30’s to show the stark contrast of the two just since the yield trough back on the first of July. The 30-year is up strong this morning but not yet strong enough to erase the still negative look of that chart to me. It will be interesting to see what the 30-year can do if it can get back to that previous yield trough.

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8/09/10 – 8:15 – A very quiet day yesterday figures to be repeated in front of today’s FOMC rate decision. The daily range was just 2.5 bps or 7.5 ticks in futures, one of the smallest range days of the year, accompanied by less than half of Friday’s volume. The low tick in the 10’s was just a tick above the trend-line that they broke above on Friday while the overnight high on Sunday was 124-24 although the day session high yesterday was 124-22, matching the high from Friday. A very tight trend-line comes into play at 124-04 although there really isn’t any support of significance until 123-17. On the upside, my next intermediate resistance is at 125-07 although I do see solid resistance in cash at 2.796/789. Certainly what comes out of the Fed meeting can move the market to either of those extremes in flash so it becomes another one of those things that can destroy an otherwise great chart pattern. A trade in cash through 2.903 would seem to break the impulsive look to the rally but the equivalent level in future is at 123-28+ and that just doesn’t seem far enough away to call a pattern breaker. I still see the rally as incomplete whether I look at it from the lows in late July, mid-July or even mid-June based on the wave structure so I don’t want to give up on it too quickly but it’s always a problem when patterns suggest higher prices after such a prolonged rally. One of the things I had noticed some time back and have mentioned in several updates is the fact that since the April bottom when the cash was trading through 4%, there has not been one instance of a swing low that produced a new high of the move and was subsequently taken out. Every swing low is a higher low and while that may be a textbook picture of a bull market, it is a pattern that is unsustainable. For now, the last swing low is a long way down at 122-06+ and that is the problem if the market turns down. A break of the up-trend-line currently at 123-02 will be tough to tolerate and maintain a friendly near-term outlook.

The stock market had a nice day, eventually closing 21 S&P points above the lows on Friday which were right on a trend-line. The picture of a wedge there is still very much intact as are my objectives for the rally which run from 1145 to 1152 but those objectives, while still my favored, failed to take into consideration the 62% correction of the April through July break which comes in at 1140 so the range of targets is getting bigger. At the same time, the trend-line that held on Friday keeps advancing and it has now reached 1115 so much like the treasuries, a move up to my targets or down through support is pretty likely very soon with today being a distinct possibility. I still prefer the upside for now but overnight selling has the futures just a few points above that trend-line and a break of it could attract more selling. I would imagine, however, that the line will hold at least up until Fed time. To break the equivalent line in the Dow, it would need to drop just over 150.

8/09/10 – 8:15 – A larger than expected drop in NFP sent the treasuries soaring on Friday, seemingly opening the door for a further extension of the rally. While there are several ways to count the 10-year from the April yield crest as well as from the crests in early June and mid to late July, the one that would leave me with the nearest objectives in terms of price and time still places them in a 3^rd wave from 7/28 and that would suggest new highs well into this week at the very least followed by a correction that should last 3-5 days prior to the final push up in the current impulsive sequence. In other words, I can’t see how wave theory could be used to make a case for a high before late August and probably not this side of 2.70 in cash 10’s. And that is the least friendly of the counts that I currently believe are valid - at least in the 10-year. The 30-year futures are not quite as convincing but still look good while the cash 30-year lags miserably and is the one chart that doesn’t seem to fit in with any of the others. At the best levels on Friday, it still remained a solid 18 bps away from the extreme it posted on July 1^st.  

While the 10’s were trading at yields not seen since April of 2009, the stocks were taking it on the chin. It is still possible that the entire rally in the SPX off of the July 1^st bottom is a wedge and potentially a C-wave wedge with incredibly negative implications. I’ll view 1095 as important support but not to be ignored is the fact that the low on Friday was 1107.17 while a trend-line coming up off the bottom on a daily chart was at 1107.47. The Dow traded down to 10,515 while the line there was at 10,472 but today it is up to 10,508 so stocks pretty much need to hold Friday’s lows. As long as those lows do hold, the uptrend will remain intact. As I’ve mentioned often times before including in the Friday morning update, wave theory suggests that the final move up in a wedge can be expected to over-shoot or under-shoot the trend-line even if it is the best target. So far the last rally fell about 4 points shy of the line but if the index can recover, that same line has now reached 1140. By Wednesday it will have reached my objective at 1145 which would be an interesting time/place to look for a top but for now, just holding Friday’s lows may be asking a lot. 

The Dollar Index remains weak and still looks like it is on course to test the 38% retracement of the entire rally out of the December. That number is 79.72 while it is currently trading with a low of 80.26. If it trades much below that retracement level, then a complete give-up of the rally that began in December can be expected. Interestingly, today a down-sloping trend-line drawn under the lows from mid-June forward is at 79.70 making that area especially interesting if it were tested today day but trading there today would represent a pretty hefty drop and doesn’t seem all that likely.

8/06/10 – 8:15 – An impressive recovery nearly wiped out the outside down reversal from Wednesday setting the stage for this morning’s jobs data. The overhead trend-line in futures has reached 124-11+ and wave theory teaches that the E-wave of a wedge, which is the final wave and likely where we are if this is a wedge at all, can be expected to either overshoot or undershoot the trend-line. That said, the line still represents best target and an overshoot of it is just that; it is not another leg up. While a slight penetration of 124-11+ wouldn’t ruin the pattern, staying above it for the day and closing up there pretty much would. And much the same can be said for the near perfect double bottom on the yield chart which could be exceeded by a small amount and still be called a double bottom – but only by a small amount with a subsequent reversal. The point is that as far as I am concerned, if this morning’s numbers have the effect of pushing the 10’s back through the highs, they either need to reverse quickly or they may not reverse for quite a while. Should the numbers not be well received by the market, there are 3 levels that I think matter in futures. The first is a trend-line at 122-28, the second and perhaps most important to the wave pattern and to me is a wave equality target at 122-22 and the third is a trend-line at 122-13. I’m of the opinion that a trade through the second of those probably spells the end of the rally but the final nail in the coffin might better be considered to be a trade below 122-06+ since that would represent the first time any previous swing low that generated a new high of the move was broken since prior to the beginning of the entire rally back in early April. The cash market has those 2 trend-lines that can matter as well and they are now at 2.978 and 2.988.

When the numbers come out, the stock market won’t be opened but the futures will be trading and the overhead trend-line in the S&P futures that defines the potential wedge there will be at 1136. Just as is the case in the 10-year, that level can be penetrated briefly before giving way to a reversal but any extended stay above it would tell me that the pattern is probably not a wedge and that my objectives from 1145 to 1152 will be met. Trend-line support below is at 1106 although a wave equality target at 1092 will need to be broken to really turn things negative.

I’ll dispense with the rest of the analysis since it won’t really matter much in half an hour but barring a real yawner that leaves prices about where they are, I will likely send out an update later this morning.

You already know what numbers I think are important but for the record, I wouldn’t be long a thing on a trade below 123-13 while on any new highs, I would trail the market with about at 12 tick stop. Good luck.       

8/05/10 – 8:15 – Yesterday’s high in the 10-year futures was 124-08 while the overhead trend-line defining the potential wedge was at 124-08+. The cash 10’s, meanwhile, touched 2.887 while the previous low yield made back on 7/01 was at 2.883 so now there is a near perfect double yield bottom in cash. I had said yesterday “We’ve pretty much reached a point where a little higher will mean a lot higher while a little lower will mean a lot lower” and that statement is even more true today than it was yesterday. Yes, the overhead line continues to advance so we could go and make a new high and still hold the line in futures and we could also go back and make a new low yield by half a basis point just to make that ‘near perfect double yield bottom’ an absolutely perfect double bottom but the point is that the 10’s have hit objectives and then retreated to produce outside down days and I’m guessing that means that the highs have been seen at least until the jobs data can be discounted by traders – which presumably could still happen before you and I get to see the numbers. To confirm an end to the wedge, I would still need to see the futures break below 122-22+.

One interesting aspect of the levels that were hit in both cash and futures is that while the patterns on those charts are considerably different, the implications from current levels are very similar. In the case of the futures, if yesterday’s high was the final top of a wedge, then they should back up considerably and right away. If it wasn’t a wedge, then a 3^rd wave price explosion is imminent since the alternate way to count a series of marginal new highs followed by shallower and shallower corrections is to call them a series of 1’s and 2’s preceding an explosive 3^rd of a 3^rd wave of … well, you get the picture. In the case of the cash market, the double yield trough made yesterday a potential B-wave low which means an immediate move back to at least the 7/13 yield crest at 3.124 in what would be a C-wave, otherwise a hard impulsive advance will occur at any time. Of course it could also prove to be a double top irrespective of any wave pattern. For now I’d have to favor the more negative outcome only because of the outside down day yesterday which appears as a true reversal. I should mention that my cash charts do not include overnight extremes and that is the reason there is an outside day there. To see the outside day in futures you have to look at a daily chart that does not include overnight sessions for which some platforms do not make accommodations.

Stocks had another decent day and did nothing to disrupt the picture that they have painted for me which seems to be begging for a trade up towards 1145/1152. The only obstacle that I see comes from that wedge pattern that I showed on Monday. The overhead trend-line has reached 1136 so if we were to fail from near that level, that could create problems but even if that happens, until the index trades below 1103, there would be no assurance that the rally had really ended.

Volume yesterday was about what it was on Tuesday for both stocks and bonds and while one might expect more of a ‘volume spike’ of sorts if that was really a cycle ending reversal in the 10’s, I would still view it as pretty much inconclusive. When I sent out the update yesterday, it included a weekly chart of the 10’s with the Cycle Stochastic which as I pointed out had erased the bearish divergence that had developed, as it did on the daily chart but that was yesterday morning before the reversal. By the close, both the daily and the weekly Cycle Stochastics had fallen back and right now, absent a recovery, they seem to be building another round of bearish divergences as you can see on the charts below. These could be quite revealing by tomorrow, especially with regards to the weekly at the close.

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So here we are, a day before the July jobs data is to be released and the fixed income markets are at what I believe to be another crossroads. If yesterday wasn’t a high, then it may not be anywhere near these levels. If it was, the degree remains to be seen but the first 20 or so bps should be a given and another 20 or so are possible even if the ultimate top of this move has yet to be seen. The critical levels for the 10-year futures are still pretty far down as I believe that until they break below about 122-22, anything is possible but the 2 trend-lines that I have been mentioning on the cash chart have reached 2.990/2.998 and I would view that area as potentially very important, especially on a closing basis. At the end of the day though, it’s all still about tomorrow morning and we’ll just have to wait and see how things play out – that of course is presuming that we don’t see a large move one way or the other today. With a gun to my head, I’d rather be short than long but that might not be the case by this afternoon. One thing the 10’s did do was offer everyone a chance to exit longs in the last logical resistance area before they would seem to be headed much higher. On any recovery today, I would use that area around 123-28+ to unload longs while using 123-13+ as a ‘no tears’ stop.

8/04/10 – 8:15 – The treasuries opened yesterday with a bid and never gave it up. The day session range was 13 ticks which is a little tighter than normal but the real feature was that there were just no sellers to be found. The high came in at 124-05+, right in the middle of the band of resistance that I wanted to sell into but even had you sold the high of the day, you got very little to show for the effort and if you didn’t cover, you had to go home fighting the highest close of the move in the 10’s and this morning they are right back up against those highs. I had said that I would sell into this resistance area yesterday and again today but that’s as close to the jobs numbers as I would want to be and still be selling, at least without some sort of a break and I still feel that way. Yesterday I spent a lot of time talking about a wedge pattern and while it remains intact, one of the characteristics of wedges is that once completed, they should produce sharp reversals. That certainly didn’t happen yesterday so I have to assume that the pattern isn’t complete – either that or that it isn’t a wedge. The 30-year vs. 10-year yield spread widened out to 113 bps, the widest level in my 30-year data base while the cash 5-year has now retraced over 80% of the move out of the December 2008 yield trough and traded to levels not seen since March of 2009,. There seems to be a real feeding frenzy in treasuries even if the 30’s have been left out of the party. I can understand why investors would rather extend 5 years to pick up 135 bps (the current spread from the 10’s to the 5’s) than to extend another 20 years to get another 113 but still, the spreads are unprecedented and it makes little sense, at least to me. Everything about the 10-year chart looks constructive although if a wedge proves to be the correct count then it may not look so constructive for long. With the strong band of resistance currently capping the rally and the overhead trend-line at the high end of that band, it is looking more and more like the jobs numbers will be the driving force in the markets going forward. We’ve pretty much reached a point where a little higher will mean a lot higher while a little lower will mean a lot lower. Sounds like a good time for a ‘strangle’.

Recently I’ve been posting charts showing what I consider to be a variety of odd goings-on. There is that spread between the 30’s and the 10’s that is wider than it has ever been even as the market tries to digest the notion of deflation and then there are those rising wedges that are being traced out in the 10’s and the stocks at the same time. Now I’m looking at a front month futures chart of the 10-year which yesterday hit 124-05+, nearly 3 ½ points higher than it was in December of 2008 when the cash 10’s touched 2.03% (see chart below). The same is true for the 5-year futures although the 30’s are nowhere near where they were in December of ’08. I’m sure there is a good explanation for that but I haven’t a clue what it is.

Volume yesterday in the 10’s wasn’t what it was last week but it was still better than on Monday when they closed lower. Open interest, which lags a day on my charts, while in a general up-trend did decline from Thursday through Monday and 2 of those were up days so at least some of last week’s rally can be attributed to short-covering though not all of it. The daily Cycle Stochastics have moved back into overbought territory and this time, the weekly took a big jump as well and eliminated the bearish divergence that had developed following the pull-back on 6/18. It could still create a divergence against the highs made on 5/14 but it doesn’t look nearly as bad as it did before this latest burst as you can see on the chart below. The Time Adjusted Stochastic, the lower one on the chart, continues to drift with a potential divergence building.

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 And then there is this next chart which is a weekly chart of 10-year yields with a linear regression line drawn through prices and then added to that are parallel lines that are 2 standard deviations above and below the center line. Channels like these are dynamic meaning that they change with every tick in the market but the changes are slow and they still offer up a good picture of what the market has done and what it is doing. What this chart says to me is that since the yield trough in December of 2008, 2 standard deviations from the center of prices has been about as far as the market has wandered – and it has wandered there again. We’ll see if that pattern holds.

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Looking at my 4 favored fixed income charts, I still see the 10-year futures as likely in a rising wedge that is about complete while the cash 10’s look like they are in a more traditional pattern but yesterday’s low yield of 2.894 is just over 1 basis point from a perfect double bottom against the 7/01 extreme. That does seem to place both of those markets in a potentially precarious position from which a reversal is not at all unlikely, although it would not have to be terminal top. The 30-year futures are in a less decisive pattern but still look constructive while the cash 30’s are the one chart that does not look particularly good to me and that of course is a product of that that 10-year vs. 30-year spread.

The overnight high for the 10-year was at 124-08 while the overhead trend-line is at 124-08+. With such a strong market, I would normally not be inclined to sell early in the morning but I still like this area in both futures and cash. A short position would be highly risky but unloading longs in this area would not be a bad idea. While I don’t view it as a very good support area, a stop at 123-23+ makes sense to me since a trade there would create an outside bar on the daily charts.

8/03/10 – 8:15 – One of the descriptions that still seems to best fit the 10-year is that of a rising wedge that would likely have begun in May. What else can you call a pattern if lines drawn over the highs and under the lows converge? At the same time, the SPX may well be in a rising wedge of its’ own but one that would have begun on the first of July. While the inception points may not be the same, I still find it odd that the 10-year and the SPX could be tracing out the same patterns. Of course, the placement of the potential wedges in a wave count are much different as the 10-year would seem to be in a 5^th wave wedge while the SPX would most likely be in a C-wave (those are the only 2 places a wedge should occur basis R.N. Elliott’s work). Both patterns, once completed, should be completely retraced although from a C-wave wedge a decline wouldn’t stop there as it should precede a large move in the opposite direction. While I’ve found that the correlation between stocks and bonds is an inverse one and one that usually only shows itself when stocks are trending lower, I still find it highly unusual that both markets could be in rising wedges at the same time. Of course, they may not be since if either one can make a significant penetration of the overhead trend-line, then the wedge pattern would be negated. While bonds have been much stronger than stocks since April, I would still suspect that the stocks will be the market to have the more powerful move from current levels but far be it for me to ‘guess’ which one will. Below are 2 charts, one of the 10’s and the other of the SPX, both with the potential wedges drawn on them along with the cycle stochastics drawn below.

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One thing about these types of patterns is that with the convergence of the 2 trend-lines, it’s only a matter of time before they complete and produce a hard reversal - or become invalid by virtue of an explosive move, in this case, up. Until that occurs, however, I find these to be very peculiar patterns to be developing at the same time.

So pattern aside, what else can we find out about these markets? I like to start with volume and there I see that on Wednesday, Thursday and Friday, all up days, volume in the 10-year was very respectable for this time of year. It was above my 50-day moving average on Thursday and just below it on Wednesday and Friday and then yesterday, when the treasuries pulled back, the volume was barely half of what it was on Friday. Open interest is beginning to expand again as well. These are both positives for the treasury markets. As you can see on the first chart above, the cycle stochastic has cycled back to the upside and the issue there will be to see if there will be any sort of divergence at the next swing highs and more importantly, will the weekly oscillator confirm the move or will it continue to show a significant bearish divergence.

Since the low on 6/03, the 10’s have completed 4 distinct rallies. The 3 previous pullbacks have covered 47, 50.5 and 49.5 ticks and perhaps the most noteworthy feature that stands out to me is that there has not been a swing low of any significance that has been taken out since the April bottom. For now, the most important support area is near 122-06+ but that number will rise with every tick into new high ground. Once the 10’s break more than 50 ticks from any swing high, the wedge will be history and we will be looking at the largest pullback since 6/03. Additionally, a trade below 122-06+ will mark the first time a swing low has been violated. These would all represent pattern changing events. The bottom line is the very thing that makes wedges significant when it comes to technical work; when a market rallies but makes only incremental new highs followed by shallower and shallower corrections, it becomes like a coiled spring with pent up energy. Something has to give one way or the other and absent an explosive move to the upside, the result is likely to be a pretty nasty decline.

The SPX gapped up yesterday and rallied to close at its’ highs, just 5 points from the 6/21 high of 1131. I still look for that high to be taken out and still think 1145 is a good objective but now I’m extending that target up to include 1152. Volume yesterday was fair at best and open interest in the S&P futures has been deteriorating since the early July lows. I suspect that represents hedges being lifted as much as it does speculative shorts being squeezed out. It does suggest that the rally is not a healthy one but that doesn’t mean it can’t meet my objectives or even sail right on through them. And just to keep you updated, the TRIN system which I watch and which had given 3 consecutive buy signals as of 7/26, has given 2 more and is now long 5 units which is as large of a position that it can take. While some of the technicals for stocks don’t look nearly as good as they do for treasuries, I still think that a solid extension of the rally will occur in the next several weeks.  

With all of the reporting I have been doing lately on the Dollar Index, I guess I need to follow up and report that it sailed through its’ 50% retracement target and kept right on going, now having broken that support by nearly 100 points leaving it just 75 from the next. If it doesn’t hold near 79.70, then the entire rally that began in December will look to be in the process of being erased.

8/02/10 – 8:15 – The charts that I posted on Friday showing the striking – and  confusing - difference between the 10’s and 30’s over the previous several days don’t look all that different anymore. True, the 10’s made clear new highs of the move on Friday while the 30’s didn’t but still, the 30-year gained 58 ticks vs. the 22-tick gain in the 10’s and  that made up a lot of lost ground. Unfortunately it didn’t make the read a whole lot easier but now the 30-year has come to within 4 ticks of the previous day session high although still nearly ¾’s of a point shy of the overnight high from the 21^st. What that does seem to suggest is that the 30’s will still trade to new highs like the 10’s have done in what now has to be read as an impulsive advance. I know that I’ve said this often lately but I have to say it again; until the treasuries develop a 5-wave structure during a decline, it will be difficult to make much of a case that the rally is over. The cash markets still lag considerably as even the 10’s have failed by several bps to make it back to where they were on 7/01 while the 30’s have so far fallen 18 bps short. That may be the best news of all since the only way that all of the charts can come into ‘sync’ with regards to their wave patterns will be for all of them to make new extremes of the move that began back in April. It may not happen that way but odds seem to favor it as more often than not, the cash markets will do what the futures markets do and nearly as often, the 30’s will do what the 10’s do. The daily cycle stochastics have turned back to the upside and it should be most interesting to see if the rally can go far enough to drag the weekly cycle stochastic up high enough to negate those bearish divergences that I showed last week. Everything for now seems to be pointing higher still.

One of the potential wave patterns for the 10-year that I have addressed in a previous update was a ‘wedge’ or ‘diagonal triangle’. The one that I showed would have begun on 5/10 and when it touched the overhead line on 7/21, it seemed realistic to consider that it had completed. Now that the 10’s have made new highs, that obviously was not the correct count but still, if you draw lines over the recent highs and under the recent lows, the lines converge and making a ‘wedge’ still a pretty good description of what the 10’s have been doing. I may have had the wrong inception point but it still can prove to be the correct pattern. The 10’s would need to break more than 50 ticks from any new high in order to break the pattern on the downside while if the rally is not a rising wedge but rather a traditional impulse wave, then it needs to extend in a big way. I think using ’50-tic’ threshold for the wedge will be a wise idea meaning a trade below 122-11 should not be tolerated if one is long. Given that I do have solid support at 122-02/06, it may make more sense to push a stop down to 122-01 but that is the furthest I would go while waiting for some new evidence that any sort of top has actually been made.  

The decline in stocks off of the 7/27 high looks very corrective and this morning the futures are up strong further indicating that new highs of the move are still likely. With the current high from last week at 1121, I think the next up move will produce a test of the 1130 high from 6/21 while only a trade below 1091 will cause me any concern. Absent some strong wave based evidence to the contrary, the rally can remain intact until 1070 is violated. Friday’s lows was right on a trend-line drawn off the bottom on 7/01 so once those lows give way, we could see some increased selling but I still think the market is good down to at least 1070. There is also a chance that the rally in stocks could prove to be a wedge but unlike the 10-year, it would be a C-wave rather than a 5^th wave. Due to technical problems this morning, it will be tomorrow before I can post a chart showing that pattern.

The Dollar Index has continued to flirt with its’ 50% retracement target at 81.44 and is currently trading a few ticks below it. If it cannot hold here, then only the 79.70 area will stand as support before much lower levels become likely - possibly new lows below those seen back in December. This could prove to be a critical week with regards to the Dollar and I will monitor it closely until it makes or breaks the support right about where it is currently trading.