^_Tbondtrader

12/30/09 - 9:00 a.m. - Well, finally something good to report with regards to the 10-year. I mentioned in yesterday's update that if the 10's could trade above 115-25, it would look constructive as it would represent the first time since 12/18 that they would have exceeded a previous day's high. Well, they stopped just short, printing a high of 115-24+ but the cash, after trading to a new low of the move, reversed and did indeed take out the previous days highs and left a very constructive looking bar on the daily charts. Not only did that action produce an outside bar with a higher close, the opening was a gap beyond Monday's high yield while the close was below Monday's low yield so as reversals go, that was about as good a one as you can find. True, the volume was low and the action was not duplicated in any of the other markets I watch, but at this stage of the game, I'll take what I can get. While I'm not optimistic that this low will prove to be all that important, it is interesting that yesterday was an anniversary date of sorts as if you look back to last year, you will see that while the all time yield trough came on 12/18, a close test of it occurred on 12/29 before rates turned up with a vengeance.  

Today probably won't produce much in the way of volume and possibly price action either and tomorrow should undoubtedly be worse and being the last report I will write this year, I'll take this time to take a look at what all has happened. We all pretty much know that the treasuries got clobbered with the 10's having closed out last year at 2.244 - the 30's at 2.691. Without doing the research, it is probably fair to say that in terms of yield, this was about as bad a year as the treasuries have seen but with the explanation that they had printed their all-time best levels in December of last year and yields really had nowhere to go but up. The stocks, meanwhile, as measured by the SPX, finished last year at 903.25 and are currently at 1126 so they have had a pretty good year if you got past the first 2 months that saw that index drop to 667 before turning up. Things look so bad in March that it is questionable as to how many investors actually stuck around for the rally. The Dollar Index finished last year at 81.31 and is currently at about 78 but there too, those 2 prices don't tell the whole story as the index rallied to as high as 89.62 and then collapsed to an all-time low of 74.17 last month before recovering to current levels. And then there was gold, which finished last year at 893.60 and for the most part, spent the entire year rallying to its' current price of 1091 although it did print 1227 earlier this month. If there were one word used to describe all of those markets this year, it would have be 'volatile'.

So what's in store for next year? Well, if you have the answer to that question, you know where I can be reached. Of course, I have my ideas and for the most part, you probably know them, at least with regards to fixed income. But for the record, I would expect to see higher yields in the first quarter but from somewhere above 4%, I would look for an improving market through much of the remainder of the year. Currently, mid-March figures to be an interesting time frame for a low. That would be a correction of all that would have happened from the 2.03% yield trough from last December and that could take many months or longer. Ultimately though, I would expect the bigger trend to continue to be up in yields as I continue to view that trough from last year as likely to be a terminal one much like the yield crest back in 1981. Of course, that's how the patterns look today but things have a way of not always working out the way you might expect and I am always open to new interpretations of the patterns as they develop. 

As far as the current market goes, a trade above 117-18 will be needed to destroy the most bearish of the wave counts that I am currently favoring although a trade above 116-23 would suggest that that higher level will be tested. Any new lows will need to see the 10's hold 3.89 otherwise 4.01 should be tested and once that area is clearly broken, I will then be looking for an end to the impulse that began late last year but with objectives beginning near 3.10 and extending potentially well beyond there. If you total the volume for the past 3 days, you still are well below the volume of 12/04, the first really hard down day this month. The one thing that tells me is not to put too much faith in any of the price action this week but next week, a full deck of players will return and just in time for the next jobs report. Have a great New Years.

Technically, the daily charts of the 10's look horrible from every perspective. While the oscillators like Stochastics are becoming more oversold than they have been all year long, as I have continued to report, there are no bullish divergences developing and while there don't need to be for the markets to turn up, the point is that they are not offering any signs of help just yet. And now, even the weeklies are approaching oversold levels but none of that means much until this thing can turn around. Volume, as mentioned earlier, has just about left the building altogether and the problem with that is that if we were to get a reversal in here, it would be difficult to trust if it were not accompanied by good volume and that's not likely to happen. Open interest has been coming down of late with prices but now, I am seeing an up-tick there suggesting new sellers are still entering the markets. That might be a function of the auction activity and can be source for a bid if we begin to rally but still, nothing is offering up any signs that any sort of bottom is being built. For that, we just need to wait. 

One of the more disturbing aspects of how we have gotten to where we are is the fact that we keep getting downside gaps. The 10's have had no less than 5 in the past month - 2 of which did get filled - and gaps are a sign of an impulse wave. This morning, while the markets all opened lower, the only real gap came in the 5-year. If that market can close higher for the day, which would presumably mean that the other maturities would close higher as well, then maybe, just maybe we will have seen the end of this current push as would then be evidenced by what may be described as an exhaustion gap in the 5-year but honestly, for now that is grasping at a straw. 

For the remainder of the day, if the 10's can hold 3.89 and close higher, the correct risk/reward play would seem to be to use the low of the day as a stop to trade against. If that were to happen, it still seems doubtful that the low would hold for long for all the reasons I have alluded to above, but still a nice bounce is bound to develop somewhere and that is the next area that qualifies as good support. Not since 12/18 has the 10-year traded above the previous day's highs so any trade above yesterday's high at 115-25 would be another constructive sign that some sort of low may have been made. To confirm any sort of bottom, however, will take more work and some volume to go along with it and for that, we just will likely have to wait until next week.

12/28/09 - 9:00 a.m. - The volume finally began to dissipate Wednesday afternoon and pretty much disappeared all together on Thursday. The same can't be said for the selling. Everything from the 2-year to the 30-year made new lows of the move on Wednesday and followed that up with new lows again on Christmas Eve and then again today. Last Monday, the 10-year broke through a trend-line dating back to June of 2007, leaving me with 3 scenarios, none of which end very pretty. One would have them testing support near 3.88 before beginning a strong rally that could carry them back into the 3.30's before the next round of selling would commence, eventually producing new high yields above 4%. Another has them testing 4% now, but then beginning a rally that could produce another test of the 6/09 yield trough at 3.10 before, you guessed it; a move through 4%. The final scenario that can be supported by wave theory has the ultimate move through 4%, occurring right now. Several things suggest that it is the most likely scenario but it is just too soon to tell for sure and why not see what happens when we reach 3.88? One thing I can't do is find a way using wave theory to make a case that the 4% yield crest from mid-year will continue to hold for much more than a few months and that is a best case scenario. The good news is that once that move through 4% completes, we should see the best rally we have seen in several years, both with regards to amplitude and with regards to time. For now though, the news doesn't appear to be good. 

While I focus mostly on the 10-year, for the record, the 5-year closed through its' 2007 trend-line on Wednesday and has continued to move away from it. The 30's, as of Thursday's close, had yet to breach their line but they couldn't have come much closer. The high yield on Thursday was 4.687 which was also where they closed and which also happened to be the exact value of the trend-line. With a close like that, it seemed only a matter of waiting for today's opening and sure enough, the treasuries all gapped down to new lows of the move once again, wiping out the last of the trend-line supports. The real concern in here is that the wave count that produces a move through 4% without a good intervening rally, would place us in a 3rd wave right now and given the inability of the markets to even stabilize, the absense of any rallies and especially, given all of the downside gaps we have witnessed lately, a 3rd wave is exactly what this looks like. That would make any decent rallies from anywhere near where we are, highly unlikely based on pattern or wave personality.  

Unlike last week, this week has a very light schedule of economic releases and will probably be accompanied by daily volume much like what we saw on Wednesday and Thursday of last week. That obviously doesn't mean we will rally, but any absence of players in this market implys an absence of sellers and while that would seem to suggest that prices could stabilize in here, I felt that way last week and look what happened. It was and is not meant to be a prediction of better prices, but rather the hope of such based on few market participants. Nothing about these charts looks constructive yet. 

As far as the scenario calling for a rally off 3.88, that still needs to be watched for as we don't need a direct hit on that number and with today's high yield just over 3.85, that may be good enough. The problem for now is that if we are about to reverse and trade back into the 3.30's, we need to see some strong upside volume come into the markets and that just doesn't seem likely at this stage of the game. We probably need to get into next week for that so for now, we can wait and we can watch and we can hope, but the markets need to do something constructive.This morning, we got our 5th downside gap since 12/03, just one of which had been filled. This one did get filled half an hour into the day and that is constructive, but it seems like an odds-on guess that it came on very light buying. Until the 10's clear 116-20, and maybe even after that, there is just nothing to get excited about.  

12/24/09 - 9:00 a.m. - The volume finally dissipated yesterday afternoon as the 10's finished the day with less than half of the average number of contracts traded on a daily basis and they closed just about where they had opened - a doji. That is a candlestick pattern that can be associated with a change of trend when coming after a significant push in one direction as it theoretically represents uncertainty of the part of traders. On the other hand, it might also represent 'selling fatigue' on the part of anyone who enhanced their holiday joy by being short the treasury market. Unlike this week, next week has a very light schedule of economic releases and my guess is, it will be accompanied by daily volume much more like yesterday or lower, than like any day prior. Absent a news shock, that would seem to suggest that prices could stabilize in here, perhaps even improve, but I seriously doubt that we are seeing the end of the selling that commenced from the highs last Friday. More likely just a pause. The 30's are approaching their trend-line from June of 2007, now just 5 bps away while the 10's gapped over theirs earlier in the week and now even the 5's have made a clean break of what looks to be a defining trend-line in all of these markets. In all honesty, the wave structure looks as though we can keep right on going up in yields from here in an impulse that may have its' sights set on targets above 4.10 - and quickly - but with 2 corrective patterns still possible if the 10's can make a stand near 3.88 or 4%, it will probably be January before I will feel comfortable labeling this current move up in rates. A trade better than 3.62 would be the first indication that the most bearish of wave counts may not be unfolding although it would take a trade on the other side of 3.51 for any real confirmation. That's not coming today and I doubt we will see it next week. 

While the 10-year has lost nearly 5 points since 11/27 - the 30's nearly 8 - in other markets, the dollar is softening following a great rally that has produced a positive 'candle' on every day since 12/04, while gold is recovering from a $150 dollar break in just 13 trading days. That is some significant volatility in all the financial markets, all except for the stock market. On December 4th, the SPX traded to a new high of the bull market at 1119 and yesterday it closed at 1120. Who could have painted that picture a month ago?

12/23/09 - 9:00 a.m. - This report is very much a repeat of yesterday's which did not go out to my main client. After gapping down on Wednesday, the treasuries stayed under pressure all day but it wasn't until 2:45 that they managed to push through the last of the support levels in cash leaving the 10's looking as though you could stick a fork in them. If the entire run up in rates since that 3.10 print in October was corrective, then the wave equality area at 3.673's should have held and if the bull market that began back in June of 2007 when the 10's were trading just above 5.31 was still intact, they shouldn't have traded through the trend-line drawn off that top which was at 3.674, but they closed through both of those levels on Wednesday and then confirmed that it wasn't a head-fake by gapping down again yesterday and losing another half point. Yesterday's gap was their 4th since the December 8th top - only one had been filled - and it just doesn't get much uglier than that. If a rally would commence any time soon, it would likely be a large C-wave rally since all that has happened since June can be interpreted as nothing more than a corrective rally and that June yield crest of 4% seems destined to be taken out. The entire pattern could be a huge triangle in which case the rally would likely come from about 3.85, or it could be a flat correction which means we would come very close to 4% before getting any traction or - and with all the gaps of late, this seems like it could be the best bet - we could be impulsing up already with targets somewhere beyond 4%. The triangle scenario would keep the 10's in a large trading range for at least then next 5-6 months while the flat would defer the next leg of the bear for as much as 2-3 months and given that we have been in a trading range since June, the impluse wave seems like the more likely scenario for now. We identified support at about 3.76 which held yesterday but which barely rises to the level of being called intermediate. Next stops should be near 3.88 and then 4%. 

If the price action of the past 4 days has not been bad enough (nearly 2 1/2 points down in the 10's), then the fact that after a downside gap yesterday morning, the 10's never even made an honest attempt to fill it before turning down with a vengeance after what by all appearances was a market friendly GDP release. This morning, they finally got some sort of market friendly news and have found a mild bid. They should try to fill the gap left yesterday at 116-20 but that may prove to be too little too late as the charts are simply a mess. Having felt that a bounce might have developed before now as the seasonal pattern called for very low volume this week, the problem was that the volume never went away. The past 3 days have seen about the same amount of volume each day and while it wasn't stellar, it was a far cry from last year when we traded with a fraction of what we are seeing now. It seems likely that the low established overnight can now hold and if we can get beyond 116-20, then the heat will be off for at least a short while. Next week is another that should bring with it low volume but we'll just have to wait and see. 

Yesterday, the Dollar Index made new highs of the move while Gold made new lows and still, the stocks just won't give up even if they do appear to be losing some momentum. 

12/22/09 - 9:00 a.m. - After gapping down yesterday, the treasuries stayed under pressure all day along but it wasn't until 2:45 that the they managed to push through the last of the support levels in cash leaving the 10's looking as though you could stick a fork in them. If the entire run up in rates since that 3.10 print in October was corrective, then the wave equality area at 3.673's should have held and if the bull market that began back in June of 2007 when the 10's were trading just above 5.31 were still intact, they shouldn't have traded through the trend-line drawn off that top which was at 3.674, but they closed through both of those levels yesterday, even if by just a basis point. A basis point is close enough to be considered a false break but follow it up with another downside gap as we did this morning and - well - stick a fork in it. If a rally would commence now, it could be within the confines of a triangle from the June '09 yield crest but that would suggest that the correction that would have begun in 6/09, would need 3 more legs to complete and that would likely stretch it out well into next year – seemingly way to long based on wave theory. The next and perhaps more likely scenario, if we are not headed through 4% now, would be to challenge that 4% June extreme in what could prove to be a B-wave that would precede a move back towards 3.10, again extending the bigger correction at least into the spring. The last and seemingly best count from here would be for this most recent run-up in rates to prove to be an impulse wave - the last from the yield trough 1 year ago - with targets somewhere above 4%. Support from here should be found at about 3.76 which barely rises to the level of being called intermediate, followed by a solid level at 3.88 before what appears to already be a date with 4%. 

Even in this holiday season, there is just no rest for the weary as today, we got GDP data and the news just keeps on coming with Personal Income and New Home Sales tomorrow and Durable Goods Orders along with Jobless Claims on Thursday. In an apparent oversight, it does appear that no news is scheduled for Christmas Day. And if the price action today isn't bad enough for you, then consider that the GDP data came in softer than the surveys and still, the treasuries are being sold. At this point, it all seems academic given the levels to which the 10’s have now gone. The 30's, having been hit worse all year long, are closer to their yield crest from June but due to a different slope to the trend since June of 2007, they have yet to break that trend-line just yet. The number there is now at 4.68 and that could prove to be good support as well. With the Fed holding down short rates the way they have, it is no surprise to see that the 5-year charts show nowhere near the damage that has been done to the longer dated issues and yet there too, we have come to the trend-line from June of 2007. Maybe that line will support the markets for now as the value today is 2.452 while the high yield there is 2.454 - a near direct hit. We can probably keep looking for support levels that have yet to be broken but for now, it seems like an exercise in futility as what is support today may not be tomorrow. 

The Dollar Index is making new highs of the move while Gold is making new lows and all the while, the stocks are just hanging in there showing no signs that the rally is over even if it is losing some momentum. This morning there comes the suggestion that some investors are moving from bonds to stocks which seems like move that is way, way overdue and if true, likely to produce 2 bad trades over the longer-term.

12/21/09 - 9:00 a.m. - A corrective bounce is what I thought we were getting when the bonds firmed up last Thursday and a corrective bounce is what we got. Following a strong day on Thursday and a higher opening on Friday, the treasury markets spent the rest of the day on Friday giving back much of the ground they had gained and they have opened lower this morning and are threatening the lows of the move. Anticipating holiday volume to kick in beginning on Friday, it seemed like this might be a prime time to look for a continued bounce but the more important determination of direction, namely the trend, is clearly pointing down and it seems to have taken over once again. Not only have the 10's opened lower, they have opened sharply lower and left a downside gap on the charts which will take a trade above 117-18 to erase. This is the 3rd downside gap left in the 10's since the top on the 8th of the month - one has subsequently been filled - and that is the kind of price action that can discourage investors from taking overnight positions in that market - as if they need to be discouraged any more than they already are. It still seems like a good bet, however, that volume will deteriorate later today and that would seem to increase the likelihood that we would drift back up to fill the gap. Should we, however, fail to do so and instead make new lows of the move below 117-00, all bets for a continued rally would be off. The real support that we need to watch, however, remains the support in the cash 10's created by the confluence of trend and channel lines as well as wave equality targets that I have been monitoring; all now bunched between 3.633 and 3.674. 

While volume in the treasury markets was to me, surprisingly high on Friday, it was still a below average volume day but the same thing cannot be said for stocks. The volume in the Dow on Friday was the highest since October of last year while the SPX traded more shares than it has since early May. There may have been some sort of explanation for that action - perhaps triple witching - as it wasn't the case in futures and not so much in the Nasdaq, but still, it can't be ignored. As far as the price action went, the SPX traded to a low of 1093.88 while the up-trend line drawn off the August lows that we have been monitoring, had a value of 1093.97. The burst in volume may have also been the result of buyers coming in when we reversed off that clear technical level. Whatever the case, that line has now moved up to just under 1096 so now, new lows cannot be tolerated within the current up-trend. 

Friday also produced continued strength in the Dollar Index which reached the best levels it has seen since 9/04/09. This morning, it is giving back a little ground and gold has caught a slight bid as well and at the same time, the stocks have firmed up overnight. The dollar will have to give up a lot of ground to erase the friendly look on that chart but it still seems like a good bet that if there is a bottom in the dollar, then a top in the stock market cannot be far behind and stocks don't have to do much more than make a new low below Friday's to make that one step closer to reality. 

I have often pointed to the action in the long end of the yield curve as well as the slope of the curve itself as evidence that investors have a different opinion of inflation expectations that does the Fed. A Bloomberg article this morning suggests the same thing as it points out that the TIPS market traded last week at the low end of the spread range for the past 5-years, showing that 'traders expect inflation, not deflation, in the coming months'.

12/18/09 - 9:00 a.m. - Following a quiet trading day on Wednesday despite both an inflation report and the FOMC press release, the dollar caught fire on Wednesday night, accompanied by a $40 drop in the price of gold, a 10 point drop in the S&P and a near half point rally in the 10-year. The 10's continued to rally throughout the day, eventually closing more than 3/4's of a point higher and have a wave pattern that could still become constructive but I think it more likely that it will prove to be nothing more than a bounce in a down market. In addition to the gap left on the 10th which gets filled at 118-14+, there is also a wave equality target at 118-14 and the 50% correction of the entire day session decline at 118-16, so until that area is exceeded, there is just nothing to get excited about. Above 16 and the short-term picture can become constructive although I doubt seriously that our longer-term wave count is going to change.

Volume yesterday was greater than it was on Wednesday and that is constructive but it was still less than on all but one of the 9 down days since 12/01. The daily stochastic has turned up from being oversold but without bullish divergence and all things considered, it is difficult to get very excited about any of the friendly technical indicators. With the approaching holidays, I wouldn't be shocked to see the volume decline precipitously beginning today and for the market to drift into a trading range that may not be resolved until after the first of the year. This is not to say that prices can't move out of here, but rather expecting them to do so may be setting ones' self up for a disappointment.

If bonds are going to continue to improve, it will likely be the result of an acceleration down in the stock market and the first indication that can happen will be when stocks take out the lows established yesterday. While the SPX traded down to 1096 with the August trend-line at 1092, the Dow traded marginally below its' equivalent line so any new lows are likely to alter the up-trends in both markets. That wouldn't necessarily mean that those markets would accelerate down, but once the up-trends are broken, anything is possible and short bond positions would need to be monitored much more closely.  

It's important not to lose sight of the fact that the cash 10's had some great support in the mid to upper 3.60's which I has suggested last week would likely not give way without a fight. The wave structure remains bearish but for now, the support has done its' job. If the volume drops drastically next week, like it normally does this time of year, then a continued bounce would become more likely as I always view low volume markets as likely to produce counter-trend moves. I wouldn't look for much, however, without some serious help from outside influences which are equally likely to remain quiet. I will probably remain in a mode of selling rallies into identifiable resistance unless and until I can see solid evidence that this rally is something more than a corrective bounce and if the volume dissipates, that may prove difficult. 

12/17/09 - 9:00 a.m. - The markets softened yesterday following the FOMC news but never produced new lows below those set on Tuesday. All things considered - CPI in the morning and FOMC in the afternoon - it was very quiet trading day. Not so much in the overnight session. The big movers have been the foreign currencies which have come under some serious selling pressure lifting the dollar index to the best levels it has seen since the beginning of September and pressing gold back down near the lows established last week. Both of those markets, especially the dollar, continue to show signs that they may have made some important trend changes and this time, the stocks have come under some selling pressure with the S&P futures down about 10 points pre-opening. That is likely the reason for the bid that has entered the bond market as the 10's have opened about 3/8th's higher while the 30's jumped 3/4's of a point. While all that has done is lift those markets back to where they were on Monday, given the proximity to the holidays, not to mention the very solid support I have been addressing in the cash 10's, we may have seen the worst levels we will see for the remainder of the year. Actually, that may be a stretch but without some really surprising news, the volume should begin to deteriorate and remain low through New Years and without news surprises, that could manifest itself in some very quiet markets. The bigger picture remains negative and that won't likely change anytime soon but with a little luck, we may have seen the worst of the decline for now. 

From here, the 10's should run into resistance around 118-00, above which there is a very good target at 118-14 within the context of this being a bounce in a down market. Interestingly enough, that objective has nothing to do with the overhead gap that gets filled at 118-14+ but it does make that area all the more interesting. The support in cash that had narrowed to a range of 3.64 to 3.67 was such good support that I always felt that it would not give up without a fight and that may also be contributing to this current bounce. If this rally cannot turn into an impulse wave and move beyond that 118-14 area quickly, the next time down I doubt the support will hold and once it gives way, objectives for the 10's will be significantly lower. Still, that move may be pushed to the back burner for a while. The stocks continue to hold the key as if they continue down and breach the trend-line in the SPX at 1092 today (it moves up about 2 points per day), they may well have seen at least some sort of interim high and that could help out fixed income markedly. 

12/16/09 - 9:00 a.m. - Santa appeared to have shown up early for at least some traders yesterday, as a pre-opening sell-off was followed by some disturbing news on the inflation front. After the weak openings, the 10's could never manage to better the highs posted in front of the PPI report and left their 3rd downside gap in previous 4 days. Additionally, they destroyed their trend-line coming off the August lows leaving targets near 116-00 looking very likely realistic. This morning, all the leaks seem to have been fixed as the markets opened about unchanged in front of the CPI report and have remained that way after the news. Actually, given that PPI came in pretty much on the screws, I may be giving too much credit to the plumbers. On Monday, I talked about the confluence of 4 trend and channel-line supports that the cash markets were approaching and now, only 3 remain. They include a down-sloping channel line now at 3.642, an up-sloping one at 3.666 (ouch) and last but not least, the trend-line drawn off the June 2007 yield crest currently at 3.674. With the FOMC news set for release at 2:15, it won't be too surprising to see a quiet day in front of that news but there could certainly be some fireworks afterwards - especially given the close proximity to what has to be described as very strong support. Despite the near historically steep yield curve and the disturbing CPI report, yesterday Fed Chairman Bernanke reiterated his belief that 'inflation remains well in check' and that the economy, while growing, remains fragile and therefore, most think that the Fed will not deviate much from their stance of holding rates very low for an extended period of time. Whether the recent selling pressure will abate if the Fed shows no signs of a change of posture remains to be seen and certainly, if they do make any material changes to recent language, we can expect some real volatility.  

The dollar has weakened somewhat overnight but there, the rally from the bottom on 11/26 has the appearance of a 5-wave move which means another rally should follow. Gold has finally attracted some buyers but there, too, the decline can be interpreted to be an impulse wave so both of those markets are flashing consistent signals although they cannot be backed up by the wave pattern in the stock market, which continues to look corrective from that 1119 high set on 12/04. Whether the dollar and stocks have de-coupled or are in some sort of transition stage remains to be seen but until the SPX can break below its' trend-line at 1090 - Dow equivalent at 10,286 - there is just nothing with regards to stocks that looks bearish.

12/15/09 - 9:00 a.m. - Following a day that produced the smallest range and least amount of volume the 10's have seen on a non-holiday related day in a very long time, they somehow found enough sellers just before 8:00 a.m. to lose a quick half point, setting up their 3rd downside gap in 4 days and this one, right in front of the first round of inflation news. Yesterday, they had managed to close just below the August trend-line which could have been taken as a warning if one hadn't already felt amply warned but still, this sort of price action in front of PPI and following such a quiet trade seems more than a little suspicious. Foreign currencies had spent the entire night selling off, lifting the dollar index to its' best levels seen since the first of October. So how did the 'gamble' pay off? PPI, expected to show an increase of .8% for the headline number and .2% for the core, came in at 1.8% and .5%. It appears some traders made a pretty good 'guess'. As so often is the case, the initial lows were seen right on the release suggesting, at least to me, that those who sold it the hardest in front of the release stood ready to cover their bets on the news. Buy the rumor - or leak - and sell the fact. 

We can now eliminate the August trend-line from the charts as well as one of the 4 lines on the cash charts, the trend-line drawn off the June yield crest. Remaining are 2 channel lines, a down-sloping one at 3.645 and an up-sloping one at 3.664 and of course the trend-line drawn off the June 2007 yield crest which has come down to 3.677. If we can managed to hold the lows made right on the news, we could view the trend-line coming from June of this year at 3.597 as still intact, with only a head-fake through it but that would seem to be grasping at straws as the treasury markets continue to deteriorate. 

As strong as the dollar has been of late, having appreciated about 4% in the past several weeks, the stocks continue to hang in near their highs. They will open lower this morning but still, the SPX is around 1108 and the trend-line that represents the first line of support has reached 1088. Gold is trading near its' recent lows, about $113 below the highs made earlier this month. A trend-line there at $1081, about $33 below current levels, if broken would seem to confirm some sort of high in that market as well as a low in the dollar. 

12/14/09 - 9:00 a.m. - Today begins what could well be the last week of the year with a full deck of players and that could present any number of curve balls with regards to patterns, based on dwindling volume. As you all surely know, light volume can produce very quiet trading or it can do just the opposite by exaggerating price swings due to thin markets. Whatever the case, this week has a full calendar of events,headlined by the inflation reports on Tuesday and Wednesday and given the slope of the yield curve of late, it is difficult for me to believe that at least some of the selling pressure that has hit the longer-dated treasuries has not based on inflationary fears. And if the inflation news isn't enough, there is also FOMC news on Wednesday so suffice it to say that the first half of this week could prove to be critical. Friday saw the 10's gap down and leave a 1-day island reversal so there is already an dark cloud above them. Additionally, they tested their up-trend line coming from the lows in August and now, any new lows would be pretty damaging. There is of course a more important trend-line, the one coming from the bottom in June, which is currently just below 116. The cash charts show a similar picture and while the trend-line from August has already been cleanly broken, there are no less than 4 lines on my charts, 3 trend-lines and one channel line, all currently between 3.60 and 3.68. The last one comes from the highs in June of 2007 and the 10's would look horrible if it were to give way. The simple fact that there are 4 solid targets in such close proximity to one another would suggest that it will take some work to get through them all but with just 18 bps to go before we reach the last one and given the fact that the average weekly range for the 10-year is about 22 bps, it's fair to say that the markets are in dire need of some good news.

As mentioned on Friday, the daily oscillators are approaching oversold but with no real signs of a bottom being formed while the weeklies are suggesting a low won't be found anytime soon. Volume on Friday remained relatively high, which is not a very good sign either although open interest did decline and that is at least slightly encouraging. 

Stocks finished last week on a positive note and the SPX looks about like it did last week, having so far stopped very close to a very solid upside target but so far, showing few indications that it can't still do better. The trend-line below has reached 1086 with the ideal upside target at 1121 followed by another at about 1140. The dollar continued to rally late Friday and finished with its' second consecutive strong weekly close, suggesting that it may have found a bottom to its' 8+ month long slide. While there has been a bit of a disconnect of late, the bigger picture is still one of an inverse relationship between the dollar and the stock market so if it is going to continue, either the stocks are going to find a top, or the rally in the dollar is likely to fail. Stay tuned.

From here, if the 10's can find a bid, they can scare a lot of the bears by erasing the gap left on Friday morning which occurs as 118-14+. If they can better that level, they can re-test the highs from the 8th around 119 but for now, even that would simply look like a C-wave rally that would give way to sharp new lows. A break in cash above 3.68 could easily be followed by a test of 4% and beyond. Friday is the anniversary of the top of the market and that can prove to be an important timing date although at this point, it is difficult for me to understand why an important turn could come as soon as Friday - unless of course, we made it all the way to 4%. 

Volume over the course of the past 2 down days was about equal to that of the preceding 2 rally days while oscillators continue to deteriorate although to be fair, the dailies are getting somewhat oversold. The weeklies are still very elevated and headed down and it seems more likely than not that they will eventually overwhelm the dailies. 

From time to time I talk about the yield curve and its' implications and I saw yesterday that the slope, as measured by the spread between the 2-year and the 30-year, reached the widest level it has seen since at least 1980. Despite what we are constantly told by the Fed about the lack of inflation expectations, the simplest explanation for a steep yield curve is usually just that - inflation expectations. Maybe it's different this time - people always like to say that - but when you have a steeper yield curve than what you had in 1980 when the 10-year was yielding as much as 13%, one does have to wonder. 

The stock market, despite the quality of that 1121 target that has so far stopped the rally, has yet to show any signs that it won't go back through its' 1119 high and the only thing that will raise a red flag now will be a break of the trend-line below, currently at 1084. Somewhat in defiance of that, the dollar does continue to look strong and gold, which traded $111 off of its' highs in just 4 days, shows no signs of a bottom. I suspect that if the dollar has bottomed, the top of the stock market is not far behind but for now, we'll just have to wait and see.

I mentioned the trend-line in the 10's at 117-16+ but it should be noted that the cash 10's closed through a trend-line yesterday suggesting more damage would be forthcoming and of course, that has already happened. The really important trend-line remains just below 3.70. That line dates back to 2007 and once broken, it would be a strong suggestion that significantly higher rates are on the horizon. One last thing worth mentioning is of the timing variety. Next weekend will mark the 1-year anniversary of the all-time top of the bond market. There are other reasons to look for a change of trend around the 20th of December but a legendary trader, W.D. Gann always paid close attention to anniversary dates and as anniversary dates go, this is a big one. 

12/10/09 - 9:00 a.m. - If it wasn't the wave analysis that was keeping me bearish, then it would probably be gap analysis that was. Following the downside gaps last week that preceded the hard break on Friday's jobs report, upside gaps on Tuesday gave the appearance that all might be well again but the 10's found sellers in those initial gaps - the 30's never even got there - and this morning, downside gaps threaten to leave an island reversal above us. Islands are rare patterns for the same reasons that gaps matter; because gaps are usually filled and therefore, islands that are left on openings frequently don't make it through the closes. A trade today in the 10's above 118-14+ will erase the gap and eliminate the island but in many respects, the damage is already done. While the 10's have retraced about 55% of their rally, they don't appear to have impulsed up, making Friday's lows not likely to hold. The 30's meanwhile, have given up 90+% of their rally and a best case scenario there is that we are probing for a bottom of a B-wave with another weak rally to follow before we plunge through Friday's lows. The cash charts look even weaker than the futures. I'm keeping this report short, saying only that it is very unlikely that we will rally enough today to turn me from bear to bull. Rather, I would hope we still have that C-wave rally to go. Stocks look more and more like they can go back and make new highs but the current high is at such a good level that I am no yet willing to make a bullish projection beyond another good test of the 1121 area. The dollar appears to be headed higher while gold, in just 4 days, gave up $111 per oz. which may not prove to be terminal, but will like be enough volatility to scare off some of the gold bugs that drove it above $1200. This has been a year unlike any other with regards to the financial markets and just how it will end remains a mystery but one we all are interested in seeing the end of. Next weekend will mark the 1-year anniversary of the top of the bond market and a prime time for another trend change so we'll just have to wait and see if it will have an impact on prices. For now, the fact that the lows from June remain intact, makes my longer-term bearish count somewhat suspect as I would have guessed the rally wouldn't have lasted much more than 2-4 months. Everything else, however, still tells me we are headed lower and until I can see some price action to the contrary, I will stick with that call.  

12/09/09 - 9:00 a.m. - A weaker stock market yesterday morning helped to produce upside gaps in the fixed income markets that put some heat on any newly established shorts but whether or not it will prove to be anything more than a bounce in a down market is very questionable. While those upside gaps remained in the 10's throughout the day, they were erased in the 30's well before the close and in the cash 10's this morning. They obviously didn't have the impact that the downside gaps left last week had. As far as the structure of the bounce goes, while the 10-year futures can still be interpreted as looking constructive, the other charts are not holding up so well and give the rally the appearance of a simple corrective bounce. The 30's, in fact, have given up about 70% of their rally already and clearly appear to have just corrected upwards. As far as levels reached at the best levels yesterday, the 10's erased part of their gap from last week and recovered just under 60% of the entire decline using intra-day extremes and a near perfect 50% of the decline using the overnight high from the 27th. The 30's barely recovered 38% of their decline and collectively, there is just no evidence from yesterday's action that it was anything more than a bounce in an ongoing decline, the same thing I suspected based on the structure of the initial break. 

Since much if not the entire reason for the bounce was rooted in the stock market, it will be worth paying close attention to stocks for at least the next day or so. So far, the decline there looks to be corrective and will need a secondary sell-off today to change that. A move back above 1097 SPX and 10,313 Dow would strongly suggest that the entire decline is corrective but of the utmost importance will be up-trend lines in the SPX at 1080 SPX and 10,189 Dow. If those get violated, increased selling pressure will become likely regardless of pattern above. 

The dollar had another strong day yesterday but is under some pressure this morning and it is fair to say that this current decline will be a make-it or break-it move with regards to the bigger trend. If we can go back and exceed yesterday's highs, then only the highs established on 11/03 will stand in the way of a fairly clean looking break of the bigger downtrend. And as a confirming market for the dollar, gold is trying to recover this morning as well but there, the entire decline from last week's record highs already looks suspiciously like an impulse wave and now will need to trade back over 1175 to show any real signs of life. 

All told, the decline off the recent top in bonds appears to be an impulse while the rally from the lows on Friday more resembles a correction. If one were to look only at the 30's, there would be no way to make an impulsive count to the upside. Additionally, the gaps that were left above on Thursday in the treasury markets all remain whereas those left below on yesterday's opening were erased in all but the 10-year futures. Collectively that would seem to warrant retaining the more bearish outlook at least until more positive evidence can be gathered. The volume yesterday finished strong enough to suggest that we may still see further advancement but for now, we will view any secondary rally as likely a C-wave to finish off the correction. A move above 119-04 would put more heat on the shorts and would be at least enough positive evidence to warrant a less aggressive stance on the negative side but the 30's are lagging and to get confirmation there, I will need to see a trade above 121-07, more than 1 1/2 points away. For now, I feel compelled to retain my defensive bias for at least another day and should we trade back below Friday's lows, another sharp decline will probably be in the works.

12/08/09 - 9:00 a.m. - Overnight, the bonds have gotten the one bit of help that can really extract them from the hole they've dug since early last week and that is a weakening stock market. Not that I think that changes the technical picture as patterns are what they are and at least for now, they haven't changed. The 10's have, however, firmed up nice enough to allow labeling the lows from Friday as the end of what is likely to be either an A-wave down or a 1st wave down. Either of those 2 counts would call for another plunge before there would be much chance of a move back to the highs and at the same time, we are approaching the gap area as well as the 50% retracement of the decline which is to say that if the wave count is going to work, the markets are entering a high risk area. And to add to the wave structure, one can now see that the volume yesterday, the first up day in the last 5 trading days, was just 635,000 vs. the 1.13mm on Friday and a 20-day average of nearly 800,000. The large upside gap this morning does give the rally the look of something more than just a corrective bounce but I'll need more evidence than just a good start to the day before I think about changing teams. A close above the top of the gap at 119-03+ will clearly put heat on the bulls and on my bearish outlook but for now, I'll need some convincing that we can continue higher. And now, the highs from yesterday take on added importance as they represent the one good technical thing about this market; a gap below us. As far as the fuel for this rally goes, the stock market, the SPX has a trend-line at 1078, rising about 2 points per day, and until that line is breached, it is more of a guess as to what this decline is all about. The dollar remains strong and gold weak and as long as those 3 markets remain in their near-term trends, bonds may stay well bid but rather than trade on 'ifs', I'll just look for a reversal in the fixed income markets and stand down on the bearishness with a close above 119-03+. That said, a close above 118-24 will be positive enough to warrant a 'wait and see' posture for one more day.

12/07/09 - 9:00 a.m. - When this report went out on Friday, the bond market had already seen what proved to be its' worst levels of the day, although the recovery was barely that. Following a drop of nearly a 1 1/2 points from the pre-employment report high, the best the 10's could do was recover half a point before giving back half of that rally by the close. The charts are a mess for all the reasons I pointed out in Friday's report and until proved wrong, I will now view the recent highs as the end of some reasonably important corrective rally - and potentially much more. While it's possible to make a wave based case that the initial decline from the Thanksgiving highs is nearing completion, it is nearly impossible to make the case using wave theory that another won't follow and at the same time, it is no longer possible to make any wave based case that the rally that began in June is impulsive. For these reasons, I will embrace a long and intermediate term bearish outlook. And that is not to suggest that the short-term outlook is positive but there is at least one extremely attractive support area that could be tested soon and until it is broken, I would assume that at least a decent bounce would come from it. At the highs on the 27th, the 10's came within a tick of the top of a nearly 4 point wide channel that has defined the rally since the August lows. With the top of the channel holding so well, the trend-line from which the channel was constructed takes on additional importance. That line is at 117-08+, rising about 2 ticks per day. Additionally, there is Fibonacci support at 117-12+/14+ coming from 2 different measurements, so that range of 117-08+ to 117-14+ (narrowing by 2 ticks per day) looks very important. Perhaps a bit further away are several levels in cash, the last of which looks to be 'must hold' if anyone is to still have a positive technical outlook. Those would be the high yield from October at 3.579 followed by 2 critical trend-lines, the first at 3.62 and the second, one that originates from the yield crest in June of 2007, at 3.69. There is also a wave equality target at 3.67. A breach of the 3.69 area would just look awful. I will obviously be keeping a close watch on those dynamic trend-lines and keep you updated as to their values. While surprising news could obviously turn us back up temporarily, until I can find a friendly structure to a rally, or go back and fill the gap left last Thursday, I will expect to see price continue to move down towards those critical supports. 

While little may have changed in the bond market after the report went out on Friday, the same cannot be said for the stock market. When the report went out, stocks were rallying based on the better than expected jobs report. Having acknowledged that they looked to be headed to new highs, the report stated that I "still view the 1120 area in the SPX as potentially critical". Well, rally to new highs they did but at 1119.01, they reversed and they didn't find support until they hit 1096. They did recover nearly 10 points of that drop but for now, that 1120 area did its' job of restricting any further advance and we'll just have to see how important those highs prove to be. For the record, 1121 represents a 50% recovery of the entire bear market. It had seemed obvious that if stocks were going to find a high and turn down, then the dollar would likely need to find a low and turn up. While the low in the Dollar Index, which was set on 11/26, was not exceeded on Friday, that market did reverse and when the dust had settled, the dollar had one of its' strongest rallies in many months and had broken above several down-trend line as well as all of the highs it had established since 11/06. And while the dollar rallied, gold sold off, eventually trading $80 below the highs set just one day earlier. The point I'm making here is that Friday may have been the beginning of something much larger for stocks as is evidenced by their performance as well as that of the dollar and gold and a downturn in stocks could be the one thing that could really help out bonds. Keep in mind though that not much damage has yet been done to the stock charts as they still managed to post a higher weekly close.

Having painted such a bleak picture for the bond market, it would only be fair to point out that while it is all but certain that the wave structure since the June top has been corrective, corrections can persist longer than one might suspect. While it seems very doubtful based on wave theory that we can continue to hold the 4% extreme from June, a sideways market could still develop and last for a bit longer. There are some powerful timing aspects around the 20th of this month but we'll just have to wait to see what the markets are doing as we get closer to that date. 

For the immediate future, with regards to stops, I will be risking as little as possible as I don't want to be exposed to the long side of a market that I really don't like. That may be easier said than done based on where the 10's are trading relative to support but it will still be my objective unless and until things look less threatening. Once I feel comfortable that a low has been established, I may be able to come up with some better objectives above but for now, if Friday's lows hold, then a 50-62% corrective rally would put us right in the gap left on Thursday and that is about as good as it seems we can do.

12/04/09 - 9:00 a.m. - On Wednesday, a late day sell-off pushed the 10's through a critical support area at 119-04+/06 right on the close, an area I felt needed to hold were we not going to test trend-line support below. That breach of support proved very telling as we opened yesterday with large downside gaps and never even attempted to fill them. The first trend-line I was watching gave way in spades while the second was slightly breached before the market stabilized. That pretty much set things up for the jobs report to be the determining factor as to just how important those Thanksgiving highs were. Actually, it may have been the jobs report that caused the break or at least, Goldman Sachs' revision of their NFP estimates to -100,000. It is becoming a pattern for treasuries to make significant moves the day in front of the jobs report. At any rate, we came into this morning at a somewhat critical juncture and got the word at 8:30 that nobody, not even Goldman Sachs, was even close with regards to their NFP forecast. Just 11,000 jobs lost in November and an upward revision of nearly 80,000 for October. The bad news is that now all 3 of the trend-lines on the futures charts have been breached with only a channel line currently at 117-06+ standing between here and the October lows below 116. Worse still, there is now no reasonable way to place the 10's in an impulse wave to the upside which leaves me with no reason to question the bigger, bearish wave count.

Aside from wave theory, gap analysis has always been a major part of my analysis and just the past 2 weeks have offered up a textbook worth of gaps to be pondered. On the 24th of this month, the 10's gapped up in what now looks to be a break-a-way gap into the strongest part of the rally with another on the 26 that produced the high of the move and which can now be viewed as an exhaustion gap. Then yesterday morning what now looks like a break-a-way gap into a 3rd wave to the downside. While the volume has not been all that spectacular of late, on the last 3 days, the only 3 down days since the top, the volume has increased each day and today, the volume in the first 30 minutes exceeded that of the first hour yesterday. Daily stochastics, which flashed a strong bearish divergence at the top are now headed sharply lower but not yet oversold and the market has already taken out more support than any bull would want to have seen. While an exact wave count from the top is not clear, whether you use the overnight highs on the 27th, or the intra-day highs half a point lower, it is all but impossible to read the pattern as anything but impulsive so for now, while getting short-term oversold, there is little reason to believe that we are looking at any sort of significant low in here. There are many, many clues suggesting that a major shift in market sentiment has occurred.

If the the technicals aren't bad enough and the jobs report not good enough for you, then you may want to consider that following the remarks made by Fed Governor Plosser on Tuesday that seemed to reveal real concerns about  inflation, those comments were pretty much echoed by two other Governors yesterday, Lacker and Bullard and that too, should raise concerns from more than just a few market participants. 

Predictably, with good news on the jobs front, the stocks are once again on the move to the upside and that can steal a bid from bonds as well. I do, however, still view the 1120 area in the SPX as potentially critical as is the 1140 area so it remains to be seen if stocks can continue their march upwards or if at some point, at least that part of the equation will help out fixed income. Gold futures, meanwhile, after hitting $1227 yesterday, are trading about $40 below that right now while the dollar, which has been very near the lows of the move for the past 2 weeks, has benefited somewhat from today's news. That would continue to be the one market to watch if you want to find a clue that stocks may be about to roll over and send their bid to the bond market. 

12/03/09 - 9:00 a.m. - A computer glitch overnight has caused me to lose several weeks worth of commentaries and about an hour and a half of my life this morning. I'm also in the midst of a computer change out tomorrow. Sorry for the inconvenience. Markets have all been hit pretty hard and are beginning to show signs of rally fatigue. Two trend-lines below have already been broken as well as several Fibonacci based targets. Goldman Sachs has revised their estimates for the NFP number to -100,000 which is a better (market negative) number than the market estimates and who of us wants to argue with GS? Don't know if their revisions are causing concerns and therefore selling - or whether they are the sellers - but regardless, the markets are digging some pretty deep holes in here from which they may have trouble extracting themselves. After reading Philly Fed President Plosser's comments yesterday which showed at the very least some concerns regarding inflation, this morning similar thoughts have been echoed by Richmond Fed President Jeffrey Lacker and St. Louis Fed President Bullard. These comments are not entirely consistent with the message we have been hearing from the Fed Chairman but important none-the-less. One thing that seems apparent to me is that when the bull market in bonds turns into a bear market, the cause will very likely be rooted, at least in part, in inflation so these comments should not be taken lightly. The likelihood that we are impulsing down from the highs has greatly increased with the next really good support in 10's around 117-26/30 which includes the 11/23 low as well as a trend-line drawn off the 10/26 low. Major trend-line is now at 117-05. I personally would have zero interest in taking on long exposure for Friday's number. First sign of life will come when we fill the gap we left this morning which is at 119-03+.

12/02/09 - 9:00 a.m. - A downside drift all day yesterday followed by a lower opening this morning had left the charts with a considerably more negative look than what they had on Monday. It wasn't just the levels reached on the downside so much as how we got there since with this morning's downside gap over the same range that we had gapped above on the 26th, the 10's had built a potential island reversal top. A quick recovery back to 119-15, however, erased the island, perhaps suggesting that the treasury markets are just not ready to roll over, but for a short while there was a reminder of just how fragile things can be with rates at these levels. The first support that seems to mean anything at all - excluding of course the gap fill number from the 23rd at 119-11 - is around 119-05 which comes from 2 different means; a wave equality target and a 50% retracement of the last leg of the rally which began on the 23rd. Should that area give way, then a continued push down towards at least the first of the trend-lines we identified in Monday's report would seem likely. The highest of those trend-lines is at 118-20 today so let's just say it would be nice if we could hold the 119-05 area.  

Volume during yesterday's decline, while still below average, was greater than that during Monday's rally and therefore merits watching going forward. During the latter stages of the rally, the volume on the up days was better than on the down days and that is the way it should be so it would be nice to see a higher close with increasing volume before too much damage is done. And if a mildly bearish pattern has developed from the highs using volume analysis, then to it must be added the daily stochastic chart which now clearly shows a very distinct bearish divergence at the top with the oscillator now moving down. Oscillators are lagging indicators which is why I don't pay them too much mind but others do and they can impact trading decisions. That oscillator alone would suggest that we are likely to consolidate at the very best, so holding good support levels while the oscillator moves away from overbought could set up a nice rally but the holding of support is critical. Other areas to pay attention to come from the cash 10's as even though they had filled their gap left from the 27th yesterday, they still gapped down today and so far, have made no effort to fill that gap. It will take a trade at 3.279 to eliminate what would otherwise be a negative looking day and at the same time, their 50% retracement of the rally from the 23rd comes in at 3.308, currently less than a bp from the worst level of the day. 

Using my best tool, wave theory, there are 2 potential patterns to consider; one uses the day session charts only and is the one I prefer although the overnight sessions cannot be totally ignored. Using day session only charts, both the 10's and 30's have nearly perfect double tops from the highs on the 26th/27th, and again yesterday. Those charts strongly suggest we are simply in a corrective pull-back and will see still higher highs. The 24 hour charts, however, reflect markets that fell sharply from the highs early Friday morning and then traded sideways until this morning. The current break could prove to be a C-wave decline and end the correction or it could prove to be a 3rd wave of a larger impulse downs. The first indication that the move down is corrective will come with a trade back above 119-22, otherwise we will have to wait for the first real rally from any low in the next day or so for clues as to whether the rally is impulsive or corrective. 

If there is one news story today that merits attention, it is one that I saw off of Reuters describing the views of Philly Fed President Plosser with regard to Fed policy and inflation. Plosser warned that the Fed may need to raise rates even before the employment situation improves which would be a very unpopular move by the Fed. He added that failing to act in this manner would risk creating inflation at above desirable levels, costing the Fed credibility. He also stated that 'the outlook for inflation was becoming more hazy'. While not a voting member of the Fed this year and a known inflation hawk, Plosser's comments will not likely fall on deaf ears. 

The dollar remains weak, gold is above $1200 and the stocks are showing no signs that they are done just yet but with some great objectives not far away. All of these markets are inter-related and trend changes could occur at almost any time. 

Friday's jobs data could be a catalyst for a big move in any or all of the finanical markets and they are likely to settle down heading into that report. It would be a good idea to begin positioning in front of it if the markets present the opportunity. A move in the 10's above 120 would seem an ideal place to put on coverage but at the same time, a break below 119-04+ would suggest that we can see the trend-lines below tested and once they give way, 120 may be a thing of the past.