tbondtrader.com

Previous Commentaries

Back Home

7/30/10 – 8:15 – A strong bid has developed overnight pushing the 10’s to within a tick of the best levels they’ve seen during the entire rally and setting up all of the treasuries for powerful upside gaps this morning. This follows a very strange day yesterday that saw the 10-year futures retrace 94% of the break from the day session highs of last week to the lows made on Wednesday, clearly indicating that they want to go higher while the 30-year recovered just 32% of its’ losses and closed below the highs made on Wednesday making it seem just as clear that they didn’t. More amazing was the fact that on the same day that the 10’s missed making new highs but just 2 ticks, the cash 30-year made a new low of the move. The spread between 30 and 10-year yields closed just over 108 bps, the 3^rd highest daily close ever, after having reached 112.8 bps, which is higher than any daily close in my 30+ year database. It may well be that some of the buying that drove the 10-year was part of a curve play or it may be that it was driven by something else altogether; perhaps a short squeeze due to deliverable issues with futures or perhaps due to hedge placement in front of and following the 7-year auction. Whatever caused the run in the 10-year, it didn’t seem to have been a statement about the current level of interest rates since it wasn’t reflected in the 30’s and that made the implications of the push difficult to judge. The wave patterns, while looking as though they might have been complete on the upside, never did look impulsive to the downside and perhaps I should have embraced that feature a little more seriously given where the market is set to open. The Price Proxy indicator that I’ve been putting on the charts of late did turn positive yesterday but for the 10-year only. Both of the custom stochastics continued to move down with the Cycle Stochastic reaching oversold territory and at current levels this morning, both are showing signs of turning back to the upside. The volume yesterday was the highest in the last 2 weeks and while some of that could have been attributed to selling during the latter half of the day, the treasuries still closed higher so that was a positive sign. Looking at a weekly chart I see that while volume is down considerably from what it was back around the end of May, it still remains about average basis a 50-day moving average while open interest remains near its’ highest levels, both patterns supporting a still friendly outlook. So despite the many features that had me in a defensive shell including wave structure (in the 10-year futures only), broken trend-lines and retracement level violations along with mediocre volume, these markets just won’t quit.

The stocks meanwhile took a bit of hit early yesterday but recovered nicely. The SPX traded as low as 1093 but recovered into positive territory before softening into the close. This morning they are once again under pressure, trading back near yesterday’s lows, but still nothing yet tells me that they cannot continue to do better. The recovery off of the lows yesterday was impressive but the fact that the indices all closed lower after having gone positive late in the day, left them vulnerable and while the decline from the highs on the 27^th clearly looks corrective, if the SPX cannot hold about 1080, that may not matter. The indicators for stocks all look about like they did yesterday morning. The Dollar Index, however, did do something worth addressing. I had mentioned that 50% target at 81.44 last week and yesterday, it touched 81.49. This morning it has extended that low by a single tick and is trying to do better. If it doesn’t hold this area, only the support near 79.70 figures to work before a likely test of the December bottom at 74.17.

While I like to do my wave work on the 10-year since that’s where all the volume is, I have always been of the opinion that both the 10’s and the 30’s should be considered long-dated treasuries and would basically do the same thing. Sure, there are curve changes that have an effect on the chart patterns but still, if one market is going to do something meaningful, then the other should do it as well. So with that in mind, I am posting 2 charts today. The first is of the 10-year futures and the second, the 30-year futures, both hourly charts that show the last rally to the top and what has transpired since then. Keep in mind that right now, the 10’s are trading at 123-19 with the 30s at 127-20. Is it any wonder that I am getting conflicting signals on these 2 charts?

<chart>

For today, I don’t want to fight the rally but would recommend using an aggressive stop. Since the 10’s approached these levels yesterday before retreating, there may not be much of a gap to use but I wouldn’t want to see them go negative on the day which means 123-02 is about as aggressive I can get. Trailing the market with a stop of about 9 ticks would not be a bad plan either. The 30-year will have a large opening gap and there, a trade back below 127-04 would make plenty of sense for a stop. On the upside, I like the idea of selling against the previous highs at 123-24 although that does risk leaving some money on the table. I guess that’s always a risk. The only good resistance above there is just over 124 and I would have no qualms about letting stuff go there.

7/29/10 – 8:15 – The 10’s recovered nicely after a test of Tuesday’s lows and following the release of the Beige Book, they took out Tuesday’s highs. The cash actually put in an outside up day which is not what one might expect to see if that ‘wedge’ pattern shown in yesterday’s update were the correct count, but it wouldn’t be out of character for any of the other potential counts from the top. In fact, I had said in the update yesterday that I wouldn’t expect to see trades above 123 if the wedge was the correct call so with the high of the day yesterday coming in at 122-29, the rally hasn’t done enough to change much of anything - yet. As I look at my screens this morning the 10’s are hovering around 123-00 so the claims number may be the determining factor. I noticed that the curve continues to steepen with the 30 to 10-year spread reaching 107 bps from somewhere in the 90’s when I addressed it a week or so ago. According to my charts, the widest that spread has ever been – at least since the late ‘70’s – has been 111 bps back in October of 1992. To me, it remains a very puzzling spread relationship in an environment where nobody is talking about inflation. I have no problem understanding why short-term rates might head lower in the current environment but once the short end of the curve adjusts to any bullish line of thinking, I would expect to see the long end trade at a level relative to the short end that made more sense historically. Given the current environment in which there is still more talk of deflation than there is of inflation, I just don’t get it. Volume yesterday was about what it was the day before so that tells us little and I don’t yet see enough movement in open interest to make any real judgments based on it. I would have to say that the decline, which has never looked to me like it was impulsive, still doesn’t so that is at least a mild positive for me. Any time the lows for the day are made near the opening while the highs are made near the close, you have to consider that a positive day and that’s just what we got yesterday. I’m not crazy enough to think that I can’t be wrong and that the 10’s might not be about to trade sharply higher but I need to see something more than one good day to convince me.

The same can be said for stocks but in reverse; one down day doesn’t make a bear market but in the environment we’ve been in for the past several years, you won’t find me saying that stocks cannot get crushed. Still, I think that stocks are in an upward correction and I don’t think it is over and still look for the SPX to exceed 1130 at the very least. The 2 stochastic oscillators that I showed on the 10-year charts on Tuesday, the ‘cycle stochastic’ and the ‘time adjusted cycle stochastic’ are overbought on the daily charts but with no divergence while they are oversold on intra-day charts ranging from 15 minutes out to 60 minutes and that would seem to support the notion that this pull-back really isn’t going anywhere. One interesting aspect however, is the fact that the ‘time adjusted’ cycle stochastic on a weekly chart is quite oversold, seemingly pointing to higher prices for some time to come if it can just turn back up. I don’t want to question that indicator just yet and will keep an eye on it for indications that stocks have a lot more on the upside than I think since that would not seem to bode well for the bond market. Without a clear read on the wave pattern for the SPX, retracement targets for this pullback are elusive but I like support at 1097/99 again near 1086/89. Below about 1083 things will become more negative to me but for now, I view stocks as likely just in a pull-back.

When viewing those stochastics on the SPX, I saw another great example of a divergence that foretold a very significant swing and thought I would post the chart today. This is a daily chart of the SPX with what are rapidly becoming my 3 favorite technical indicators. The upper stochastic is the Cycle Stochastic while the lower one is the Time Adjusted Cycle Stochastic and again I have included the Price Proxy, the line plotted through prices. I drew 2 vertical lines on the chart through the high on 4/15 and then the final high on 4/26. Follow the lines down and look at where the 2 stochastic swing highs occurred. On both indicators, the new high in the SPX was not confirmed by those oscillators and the failure was huge. And while you can see that during the rally into the highs the Cycle Stochastic gave a series of lower highs and never even came close to confirming the rally which carried on considerably, the Time Adjusted never confirmed what the Cycle Stoch was saying and neither did the Price Proxy. What matters most is where we are now and that is with both stochastics in overbought territory but neither having yet turned down and neither with any divergences. And of course the Price Proxy remains positive as well.

<chart>

This summer has been a classic example of what is frequently referred to as ‘the summer doldrums’. The intra-day movement of stocks and bonds has been choppy at best with most of the action taking place early in the mornings. It wrecks havoc with the patterns which is what I focus on primarily. That said, to me the longer-term patterns are deteriorating and while many trend indicators are still pointing higher, they are lagging indicators and need to be viewed as such. I don’t aim to be stubborn in here but I am still concerned. For today, I would use a trade above 123-09 as a trigger to exit any short exposure while using 122-17+ as my support number to play against. I’d like to see the SPX remain above 1097 if I were long while a trade above 1116 should open the door for new highs and a potential run at 1130.

7/28/10 – 8:15 – The 10-year futures broke below 122-09 which was the last support that needed to hold for me to believe that the impulse that began on the 13^th might still be alive. The truth is that I had lost hope that it would hold a few days back. I for one thought that those charts that I posted yesterday were most telling and suggest we may be in for a rough patch in the fixed income markets. Especially that weekly chart which seems to be suggesting that a low is not to be expected any time soon. Not so for the daily chart though as after yesterday, that oscillator has already made it pretty close to oversold. I’ll for sure keep an eye on it and post the chart again when it looks to be turning up but coupled with the weekly, I would have to think that the next rally will not produce new highs. I certainly won’t be putting all of my eggs in that one basket of customized stochastics but with several wave counts in play which could produce some substantial downside, I will not be ignoring them either.

Among the features that got my attention yesterday was the fact that the cash 10-year spent the entire day above the down-trend line (yields) that I’ve been monitoring and that had held prior to the open yesterday. The 10’s jumped over the line on the opening and the low yield for the day was still higher than the value of that line. Couple that with a close near the worst levels of the day and it just doesn’t paint a very pretty picture. Volume increased yesterday which means that 3 of the past 4 days have been down days and the volume on each of those days was greater than it was on the lone up day. I want to keep an eye on open interest in here but it’s a little too soon to draw any conclusions. For the record though, there was an up-tick during the decline and that is a negative pattern in the making if it continues. On a positive note, I am still not comfortable with the idea that the treasuries are impulsing down and while that doesn’t preclude them from backing up quite a ways in what could still be a large correction, it does seem to suggest that the ‘worst case scenario’ of the treasuries slipping back into a true bear market is not a likely outcome. That said, it really is still too soon to make the call that we are ‘correcting’ down. If the pattern in the 10’s is going to prove to be impulsive on the downside however, then I wouldn’t expect to see trades much above 123.

Stocks traded higher early yesterday but couldn’t retain the gains and settled back down to close lower than where they had opened and mixed for the day. The SPX did trade above that 1115 technical level but closed back below it. I don’t think that means the stocks are in for trouble but a few days of backing and filling surely wouldn’t surprise me. No more buy signals in the TRIN system but it does sit long 3 units with some nice profits and shows no signs of being ready to book them. I had mentioned a support level in the Dollar Index at 81.44 and yesterday that index touched 81.82 which is pretty close but so far, no reversal. I still want to watch that and see if the inverse relationship to bonds that has been pretty impressive since the first of June will continue, although from April through June the relationship was a direct one.

I want to post a chart of the 10-year today with a slightly different wave count than the one that I have been showing. In one sense both charts suggests the same thing; that the 10-year has been in a 5-wave rally since 6/3, a rally that I always suspected was a 5^th wave, and that it may very well have come to an end. This ‘newer’ count suggests that the 5^th wave rally actually began in early May rather than on 6/03 as I had previously thought and that it took the form of a ‘rising wedge’ or ‘diagonal triangle’. Elliott teaches that wedges are typical 5^th wave patterns in markets that as the book says “have gone too far, too fast”. The biggest difference between the 2 counts is that if the rally was a wedge, then wave theory says it should be completely retraced and in less time than it took for it to complete. That latter part only goes to tell us that the decline will take less than about 9 weeks which is not too surprising since declines are frequently faster than the rallies that preceded them. But that first part, the one that says the wedge should be completely retraced, does tell us something different. The more typical 5-wave advance theory that I have been embracing leaves open the door for another rally commencing from any of several levels, most notably in the general vicinity of 121, which is a far cry from what that potential wedge pattern suggests since it would have commenced from 117-05 which would represent the bottom of wave-4. So in that sense it does have more bearish implications. One of the reasons I don’t like this count is that it doesn’t really fit with the other charts that I watch; only the 10-year futures. That said, take a look for yourselves and see what you think. What got my attention is that fact that the highest high in the futures was at 123-24 and it occurred on 7/21. The overhead trend-line that defines the top of the wedge and advances each day was at 123-24 on 7/21. Wedges are 5-wave moves themselves but differ from typical impulse in that there is overlap of the 4^th wave into the 1^st wave and each successive move is 3 waves and smaller than the previous one so that lines drawn above and below the pattern converge. The wedge is labeled A,B,C,D and E. Forgetting wave theory for the moment, it does appear that the trend-line drawn from the lows on June 3^rd provided some support yesterday so perhaps that market can still firm back up. I’m not holding my breath.

<chart>

For today I would be playing my cards close to the vest, using a break of minor support at 122-04 as my stop while looking to sell near 122-22+.

7/27/10 – 8:15 – The treasury markets continued to deteriorate yesterday morning with both the cash 10’s and 30’s trading through their trend-lines that had defined the slope of the rally since the April yield crest. Not to be forgotten, however, was the trend-line in the 10-year futures that had reached 122-11+ and when the future got to 122-12, they turned around and eventually closed about unchanged. Would this prove to be a false break of the lines in cash? It would have been foolish to answer no to that question since the 10’s closed back below 3% but if you noticed, I never spoke wrote much about the trend-line in futures and for a reason. When applying the line to the futures chart, at the point of origin, the April low, the current contract was not front month and was trading with little volume and at a large discount to account for the ‘cost of carry’ built in to a futures contract. The correct term is ‘backwardation’. At any rate, while the line may work, it doesn’t reflect the true trend of the market, at least not to the degree that the cash does. The fact that the trend-lines gave way in cash was more compelling to me and suggested that the trend had been altered for the worse. Couple that with potentially completed impulse waves from 6/03, a double top in the cash 10-year and some negative looking indicators that I am about to show you, and I just don’t see how to avoid adopting a defensive posture. And if all that weren’t enough, the stocks still look very constructive and at the very least, that would seem to take away some of the potential bid from fixed income. Still, my ‘uncle point’ at 122-09 has held - so far - so a complete recovery is still one of the potential outcomes from here. I’m not optimistic that I will be able to say that for much longer.

Another good day in equities brought the SPX to with 3 points of the 50% retracement of the entire decline and while it would be wrong to dismiss that area as a potentially strong resistance, I think we can still do better based on pattern. An impulsive looking decline from very near 1115 might change my mind but for now I am continuing to view 1145 as a good target with 1130 to most obvious resistance to overcome first. That said, the volume yesterday was awful, especially for a market posting its’ best levels in more than a month so that raises a red flag even if my TRIN based system flashed the 3^rd buy signal in as many days. The simple fact that the SPX has rallied 55 points in just the last 5 days leaves it overextended at the least so a correction could develop at any time but my outlook remains positive. I see support near 1105 at a gap fill and then at 1097 and again near 1086. Given a close yesterday near the highs, I’m not suggesting an immediate break but just for the record, if something cause stocks to break, those are the levels I see as important. Another problem for me is that I don’t view this rally as likely to be an impulsive one and therefore, choppy and corrective looking up-moves may be what we have to deal with. For now though, I like stocks and think they can do better over the course of the next several weeks – that even after I learned that a noted market forecaster who relies on astrology has apparently called for a ‘crash’ of some degree beginning now.

I haven’t mentioned the Dollar much of late and for good reason; I don’t have a good opinion of what it is doing. The last time I mentioned it I felt it looked as though it was headed lower and it did but I’m having trouble reading the decline, the rally prior to this decline and much of what went on since early 2008. For now, it appears as though it has more downside near-term and maybe much more. Having closed at 82.08, I see support at 81.40/45 and then about 79.75 below which it can be headed all the way back down to the lows from 12/09 at 74.17. I do want to keep a closer eye on it since the highs of the move in the Dollar Index came on 6/07, just 2 days after a low in bonds and each has basically gone in one direction since. If one turns perhaps they both turn so keeping one eye on the nearest support at 81.40/45 is probably a good idea.

I wanted to post 2 charts today, both charts of the 10-year and both with an indicator that we’ve all heard of but in this case, it is a little different. It is a stochastic but not your basic cookie-cutter stochastic. Rather it is a stochastic, or shall I say a pair of stochastics, that someone much smarter than myself figured out how to improve upon. They factor in cyclic information and appear strikingly different than the one that comes with most trading platforms. The first chart is a daily chart of the 10-year with both of these stochastic oscillators on it. As you can see, the upper one looks almost like a sine wave of a particular frequency it is so regular. From almost every swing high to every swing low, it moved from overbought to oversold, regardless of how important the swing appeared to be. The fact that it just turned back down suggests we need to see it move considerably lower before we can expect to see the next rally develop. The lower one is the one that has me based on the bearish divergence formed at the recent highs when the oscillator, for the first time since April, made a sharply lower swing-high while prices were putting in their top. Using any stochastic, that would be a warning sign of lost momentum and in this case it is most apparent and difficult for me to ignore. I’ve also plotted the indicator called the Price Proxy which is the one I have shown before that looks like a moving average - but isn’t. It is cyan when in a buy mode and red when in a sell mode and as you can see, when I printed these charts yesterday at 3:00, it was still cyan but at 122-22 yesterday, the indicator was flashing red so that was a pivot of sorts that we needed to remain above. Moving to today, however, that ‘pivot’ has moved up and even when the 10’s were trading at 122-23+ last night, that indicator had turned to red indicating a ‘sell’.

<chart>

The second chart is a weekly chart with the same 2 stochastics on it. There you can see a remarkable bearish divergence at the recent highs formed by the first oscillator and if you look closely, you’ll see that there was also bearish divergence from several weeks back. The second (lower) stochastic is only just trying to turn down so we’ll want to monitor it but collectively, these indicators are a real concern to me, especially with a market that is flashing at least potentially mature wave patterns.

<chart>

The treasuries have come under some pressure overnight, accompanied by higher stock prices, and are set to open near yesterday’s lows. I see good support at 14+ and then only mild support at 122-04/08 before I expect to see trades well into the next handle. Pick your poison for a stop but below 14+ I don’t like it and the truth is, I don’t like it now. If the 10’s can retain a bid quickly, I would look to sell around 122-26. The one chance I see for a better market today would materialize if the SPX opened very close to 1115 and failed. It appears that if it opened right now, it would be above 1120 but in the event things deteriorate there in the next hour, you may just want to trail any potential rally in the 10’s with about an 8-tick stop. I don’t think that happens, however, and don’t like the idea of getting too cute with the treasuries until I can find something in the way of positives from the chart patterns.

7/26/10 – 8:15 – The treasuries opened weak on Friday but turned around in the first several minutes of trading when the 10’s touched exactly 3.000% and the 30’s touched 4.004. Within an hour they had bounced 7 bps but that was all they could manage before turning around and closing back at their lows. Actually, the 10’s held 3% on the close by an entire .006 but the 30’s made new lows and closed at 4.019. Everything about those closes looks bad. The fact that they initially rallied from those levels tells me that buyers used them as entry levels but they were likely disappointed with the closes. The fact that both closed basically on their lows is a bad sign since not only were they the lows for the day but they were also the lows for the week. And while the 10’s still have a few bps left before they hit their April trend-line, currently at 3.026, the equivalent line has basically caught up with the 30-year. That incredibly tight 7½ bp weekly range in the 10-year that I addressed in Friday’s update was finally extended to 11 bp - still very small by any standards - but the extension was all on the downside so that doesn’t make things any better. Both the futures markets have ‘key reversal’ tops on weekly charts by virtue of having made new highs of the move before closing lower for the week, while the cash 10’s made a nearly perfect double yield bottom against 7/01; the 30’s fell about 7 bps shy of their 7/01 yield trough. Volume on Friday was better than average and better than Thursday’s although in fairness, the volume on Thursday and Friday, both down days, was about the same as it was on Tuesday and Wednesday, both up days. As far as wave structure goes, the rally from the low on the 13^th clearly looks impulsive although the noise that occurred after the highs on Monday, when some of the markets made new highs while others didn’t, did murky the water. Still, if I don’t allow myself to be too distracted by those very short-term patterns, I see 5-wave advances from the lows on 6/03 which could prove to be the 5^th wave of the bigger move – the one that began last April at 4.01. On Friday morning I wrote an update with a paragraph about what I thought were the positives and one of what I thought were the negatives and they were each about the same size. No need to worry this week, I don’t have one for the positives. It seems like a few sentences will do. The pattern since the highs on Friday is not impulsive looking and that does mean a lot to me. My worry is that we break hard this week forcing the adoption of a more negative count. And we still have yet to trade through levels that would preclude another thrust up so the bigger impulse may not be over, but I would say that it is at risk and the burden will be on the bulls to support the markets early this week or that may no longer be true.

If good news is what you’re looking for, look no further than the stock market. Both the SPX and the Dow exceeded their highs from the 13^th with the SPX closing through that band that represented wave equality targets from 1099 to 1101 and now I see little reason to think they don’t go and test the 1130 high from 6/21 and honestly, I think 1145 is a solid target. The Dow equivalent would be around 10,800. This all may be too optimistic as the summer doldrums have had a grip on all of the financial markets for a while now and they may continue to exert their influence but it’s fair to say that technically, stocks look pretty good and I believe that wave theory work can well support my outlook. The TRIN system that I continue to mention and that gave a long signal on Thursday is programmed to enter the market with up to five units on any one trade if buy signals continue to be generated. A second one was generated on Friday. The volume was fair but less than what I would have wanted or suspected to see on a day when a trend-line was broken but again I have to say that it is probably a function of summer time.

At a glance I would say that 123-01 is the first level of any significance that needs to be exceeded to run some shorts while I’ve always liked the support at 122-17/17+. Only a trade below 122-09 would appear to signal an end to the current impulse, the one from the 13^th, but for today I’d be gone if 17 didn’t hold while looking to sell at 123-00.

I’m including a chart of the 10’s showing the up-trend line as well as the labeling of the 5-wave advance from the 6/03 lows which is the advance that has me concerned. I’ve also included the Fibonacci retracement targets that are pertinent if we are correcting that impulse. As you can see, testing even the first major Fibonacci target would take the 10’s cleanly through their trend-line. For things to remain positive, I think the treasuries will need to catch a bid early today and retain it as almost any downside will violate the current up-trend. All’s not lost if the trend-line gives way but I would expect to at least see trades in the 121’s if it doesn’t hold and then a recovery will become a must.

<chart>

7/23/10 – 8:15 – While the treasuries were quiet all day yesterday, that ‘compelling’ picture of a 3^rd wave in the making that I showed in yesterday’s chart pretty much went up in smoke when the cash 30’s closed on the wrong side of 3.94. It actually was already smoldering when the bonds couldn’t open better from the close on Wednesday. That isn’t to say that they can’t still have 2 more rallies to complete the impulse from the 13^th but rather that the 3^rd wave of that move, if there is to be one, has not yet have begun. It would be a stretch to call yesterday a ‘reversal’ but given the solid upside reversal from the day before, it was a certainly a disappointment.

The stocks are a little different; check that, they are a lot different. Despite what has obviously been a great deal of indecision on the part of equity traders, yesterday’s rally made a real statement to me. The SPX closed well above a down-trend line drawn off the April top and while it remains below the 1099/1101 wave equality target I have been monitoring for several weeks now, the way they recovered from the disaster that was Wednesday, the odds of that area holding again have dropped appreciably. I’m still not impressed with the volume pattern. Yesterday the volume in futures was still below average and it was also lower yesterday than it was during Wednesday’s collapse. I’m beginning to think that given the time of year, I’m just going to have to live with the ‘less than average’ part but it’s still difficult for me to view this as a quality rally when the volume keeps favoring the downside. That said, there was an up-tick in my TRIN indicator and in fact, a buy signal was generated buy it. It covered a previous short with a small loss but the overall performance of that system is nothing short of spectacular so any buy signal is a good sign for stocks. I see from a reliable source that there are upward cyclic forces into next month and while I may have doubted that if pressed 24 hours ago, I don’t doubt it now. If the SPX can just take out 1101, and I’m thinking it will, I think it can also exceed the highs from 6/21 near 1130 and move on to a wave equality target around 1145.

With so many mixed signals from the fixed income markets, I thought the best thing to do might be to simply weigh the positives against the negatives. For starters, on the positive side of the ledger is the simple fact that treasuries remain very close to their highs and with short-term wave patterns that are not at all bearish. It seems like from every new high, the pull-back is corrective looking. Additionally, the cash 10’s have now spent the entire week below 3%, the first time that has happened since 4/24/2009 – of course the week isn’t over just yet. And another positive comes from the fact that yesterday was the second time in 3 days that the SPX had a 25+ point rally and yet it didn’t have much of a negative impact on treasuries. Sure it probably kept them from rallying but it didn’t do much to knock them back either. And volume in the 10-year was less yesterday than it was on Tuesday or Wednesday, both rally days. In fact, over the past 7 days, 5 were up days and 2 down days and each of the 5 up days produced more volume than did either of the down days. Along with the general upward movement in treasuries over the past few weeks, so too has there been a general increase in open interest implying fresh buying. And those volume and open interest patterns exist not only in the 10’s, but in the 30’s as well.

On the negative side of the ledger, the 10-year futures have a nice 5-wave rally from the lows in early June and so far the high is 123-17+ for the day session, 123-24 if you include overnight trades while one of my favored targets for the rally had been the resistance I had isolated at 123-20/21. That’s not really negative but it does paint the picture of a potential top – the key word being potential. If you recall, one of the things that really seemed to telegraph an impending top in equities in April was the fact that as they continued to rally, the daily ranges got smaller and smaller suggesting a lack of real participation. Looking at a weekly chart of the 10-year, I see that a 21-week average of the weekly ranges is about 19 bps while so far this week, the range is only 7.5 bps. Some selling overnight figures to extend that this morning but that’s still extremely tight and the disturbing thing about it is that this week, as mentioned earlier, is the first one in well over a year that was spent with a 2% handle - and yet no one seems to care. I don’t know how far back you have to go to find a range like this one but it hasn’t happened this year or even last. To put it into more perspective, the range during the week from Christmas to New Years was just over 13 bps. The week isn’t over yet but I still think that is an ominous sign.

I swear I didn’t plan it this way but the paragraph for positives as well as the one for negatives each took up 11 lines so I guess with all of that work, I still can’t come up with much of a bias. I hate saying this as much as I’m sure you hate hearing me say it but until we make a definitive break one way or the other, I just can’t make the call. For today, I’d use 122-16 as a stop on any longs and even if that level holds, if the close is near the lows of the day, which would also place it near the lows of the week, I would not go home long. I’d still use 123-20 as a sell area but doubt we’ll see it and would happily unload longs on a trade back to 123-08. The trend-lines on the cash charts that I had mentioned earlier in the week have reached 3.038 in the 10-year and 4.028 in the 30-year and I absolutely wouldn’t fight a break of either of those. Have a nice weekend.

7/22/10 – 8:15 – If all you did yesterday was to buy against the first support in the 10’s and sell against the first resistance in the SPX it would have been quite a day. My first support in the 10’s was 122-00+/02+ and the low came in at 122-00 while first resistance as well as my break point in the SPX was 1090 and the high was 1089. Each market hit those extremes early and made big moves away from them, most of which came as the Fed Chairman was giving his first day of testimony before Congress. I’m not as concerned with the levels as I am about the patterns. The 10-year futures stopped just a plus shy of Tuesday’s highs while the cash 10’s made a new low yield by .002 bps – a near perfect double top. The 30’s had a better day with the futures finally exceeding their 7/1 highs and by 9 ticks, though the cash continues to struggle, falling 8 bps shy of its’ 7/1 yield trough. While the cash 30-year may be the ‘dog’ of the bunch, the wave structure there actually looks more compelling for a continuation of the rally than it does with any of my other charts. A few days back I talked about the distinct possibility for 2 more ‘legs up’ to complete the impulse that had begun on the 13^th and now the cash 30-year chart just might give the best depiction of that wave count. Following a 5-wave move that produced the yield trough on the 16^th, they traded with a clear corrective structure, finally making a yield crest yesterday morning at 3.993 while their 38% retracement target was at 3.997. From there it appears that they may have begun another impulse which could prove to be the 3^rd wave of the move that began last Tuesday and if it is, then the rally should gain momentum quickly and the 30’s should push on through their previous best levels at 3.828 on the way to completing this 3^rd wave in the next several days and that would still leave waves 4 and 5 to complete, likely by next week. I know that’s a lot of talk about wave structure so I’m posting this chart to hopefully clear things up. It’s a 30-minute chart of 30-year yields (off by a decimal) from the yield crest on the 13^th showing what I believe to be a valid wave count and I’ve included the Fibonacci retracement targets with the 38% mark that held yesterday as I think that helps to define the pattern.

<chart>

As you can see, I’ve taken the liberty to show what I think could be waves 1 of 3 and 2 of 3 (note the question marks) which would imply the strongest part of the rally is at hand. I was a little reluctant to include those since they would seem to have suggested that a strong opening gap this morning was likely, one that didn’t materialize. Remember that 3^rd waves are usually the most powerful in a 5-wave sequence and in this case, not only would a 3^rd wave have begun yesterday morning, but a lower degree 3^rd wave would have begun yesterday afternoon. At the very least, you could expect to see the bigger 3^rd wave equal the size of the 1^st which covered about 18 bps so that suggests at least a 3.81 likely during the next several days. Gap or no gap, that’s a pretty clean interpretation of that chart and until the 30’s print something back through 3.94, they will look powerful. If things don’t turn out so good and we get a failure at any time, it is worth noting that trend-lines drawn off the April yield crest in both the 10’s and the 30’s, are chasing yields down and must be given some respect if they were to give way. In the 10’s the line has a current value of 3.05 while in the 30’s it has reached 4.04. For now those trend-lines seem safe but the markets need to continue to strengthen since the lines will continue to drop by about 1.3 bps per day. I’ll keep you updated on their values.

The SPX made its’ high at 1089 in the opening minutes yesterday and drifted around aimlessly until the Bernanke testimony at 2:00 which sent it tumbling. While that early high was well though the 62% retracement of the previous decline, it still fell just 1 point shy of my 1090 breakout point and by 3:00 it had given back nearly 75% of the ground gained on Monday. Volume exceeded that of the 2 previous days, both up days and as far as simple price patterns go, the chart now shows a strong upside reversal followed by an immediate strong downside reversal and on higher volume. The TRIN indicator continues to weaken and absent a strong recovery, may well prove to have been the best indicator of all as it gave sell signals last week and confirmed them right on through the rally. If Mondays’ lows were to give way, then only 1040 stands as support this side of 1000 and in my opinion, if 1000 is seen, then 925 is very much in play. But of course there is a reason why the treasuries have lost their bid overnight and it is probably because the equities found one. The futures are up about 13 which means they’ve now recovered about 66% of the ground lost since yesterday morning. Do you get the feeling there is some uncertainty out there?

From my perspective, both stocks and bonds are coiled up and ready to make dramatic moves. Bonds still look good but once the bigger impulse ends, the 10’s could easily see yields back in the 3.30/3.40 area and fairly quickly. In the case of the SPX, a trade above yesterday’s highs would seem to imply they may be headed back towards 1150, a level they haven’t seen since early May. With Chairman Bernanke set for another round of testimony today, the volatility can continue to expand. Yesterday’s extremes in both markets appear to be extremely important.

All of this brings me right back to the 10-year where 123-00 has taken on some added importance. I’ve always liked the 123-20 area as a sell but now the wave structure doesn’t seem to fit with a failure from a slight new high. Still, I think we are in a mature stage of the bigger impulse that began way back in April and that tells me to pay close attention to supports and honor stops. If 123-20 were printed today, I would lighten up long exposure but I am not ready to get short. The 10-year chart can well withstand a bit of a pullback but that 30-year chart shown above is one that looks so powerful that if it cannot attract buyers now, I have to wonder what it will take. Of course I know what it will take; it will take a weakening stock market. I would take a step back on a trade below 122-17 in the 10’s, a trade that could come quickly if the stocks can trade back above yesterday’s highs.

7/21/10 – 8:15 – The 10-year futures made another new high yesterday and while cash continues to lag, following the morning rally the yield on the 10-year has now come to within just over 1 bp of its’ previous best level. That’s close enough to call a double top or even a failed impulse wave; at least for me it is. I had said yesterday that I had a problem believing we could be ending an impulse wave with the cash 10’s failing to make new highs by as much as they had but now, that is not so much of an issue. I’d still view the short-term patterns as being a more bullish than bearish but from these new highs an impulsive looking decline would change things. If you recall, I was leaning in the direction of still higher highs – perhaps much higher - based partly on the corrective look to the pullback from Friday’s high but that no longer matters since we’ve exceeded those highs – at least in the 10-year. The 30-year remains the ‘fly in the ointment’ as it continues to struggle at these levels with the yield trough from 7/1 still 15 bps away. Back on the 13^th, I posted a chart of 30-year yields minus 10-year yields which was near record levels and seemed to imply a fear of inflation. Since then we’ve seen PPI and CPI come in better than expected as well as having heard the Fed say they are lowering their inflation expectations and yet that spread, which was at 99.4 bps last Tuesday, is now over 103. Go figure. For what it’s worth, the 5-year has continued to make new highs along with the 10’s, so clearly it is the long end of the curve that is having problems. The idea that I put forth yesterday of the treasury markets needing 2 more impulses up is still very real but now, any impulsive decline from the new highs in the 10’s would greatly reduce the odds of that happening. For now though, I’m still impressed by the strength of at least the 10-year which still closed higher yesterday despite the fact that the SPX rallied more than 30 points off of the morning lows. That should be worth something.

So what about stocks? For several days I had been saying that the only 2 support levels in the SPX that I thought mattered were at 1055 and again at 1040. The low yesterday came in just under 1058 and for the record, that 1055 objective was nothing more than a 50% correction of the preceding rally. The equivalent level in the Dow was at 10,006 while yesterday’s low was 10,007; yikes. With no news to rely on - or to be fearful of - the rally may well have been the product of that rather obvious technical level. Not only did the support hold and produce a 30 point rally, it also produced an outside up day with a close at the highs and on increased volume from the day before. Technically that’s very powerful. The volume on both of the rally days is still lower than it was on the 2 down days that preceded them but still, increasing volume on the rally is what the bulls should want to see. Not so for my TRIN indicator that I mentioned a few days ago which was flashing bearish divergences, it still is even after the big up day yesterday. A trade in the SPX above 1090 (yesterday’s closes being at 1083) would seem to eliminate the most negative of scenarios although the Dow still needs to clear 10,325 (10,229 close) to justify the same outlook.

With the new highs in the 10’s, come new retracement levels to watch for. There is still support around 123-00 but now, 122-24+ and 122-17/17+ are the key levels to watch. A trade below them would get me out of any longs although it will still take a break of 122-09+ to seal the deal as far as near-term new highs are concerned. The fixed income charts didn’t change much yesterday but the stocks did and that can have a profound impact on treasuries. If the rally in equities continues, then at the very least it will likely rob the treasuries of some of their bid. This afternoon Chairman Bernanke begins 2 days of testimony before Congress and that can still be a market mover.

7/20/10 – 8:15 – The intra-day charts of 10’s and 30’s show impulsive rallies from the low on the 13^th into the highs on Friday, followed by what now appear to be corrective moves into yesterday’s close. A 5-wave rally to a new high is exactly what I was looking for but only the 10-year futures made new highs and that is suspicious to me. It seems to suggest that there may still be plenty of room to improve. The corrective look to the pullback is suggesting that the rally was only the first wave of a new sequence and that means 2 more rallies with ultimate targets still well above current levels. In other words, the rally from the low on the 13^th may be just wave-1 of a new impulse and not the entire thing. I could understand the 30’s underperforming the 10’s but the cash 10’s not confirming the futures highs just doesn’t seem to fit with the notion that Friday was the end of a larger degree impulse wave and now that is being confirmed somewhat by the corrective nature of the pullback. So unless the 10’s break back below their 62% correction of the most recent leg up, which comes in at 122-08, I just can’t let myself get too negative. (I’m posting charts at the end of this update so that you can see the wave structure that I am speaking of). The stocks had a decent day with both the Dow and the SPX first falling below their 38% retracement targets but then recovering to close back above them. While only a fraction of the ground lost on Friday was recovered, the fact that the indices all closed higher after such an awful close on Friday should have come as a relief to most who are involved in those markets.

Yesterday’s pull-back in the treasuries came on far less volume than what they had seen during the 3 previous days, all up days, while the rally in stocks came on far less volume than did the 2 down days that preceded it. This suggests that yesterday’s moves in both markets may prove to be counter-trend and I continue to think that the stocks must hold supports, most visible to me at 1055 and 1040, otherwise they could be in for quite the down-draft with that 923 objective still very realistic. I know that based on the last several days reports, it might seem like I am getting excessively bearish stocks, especially given that the 90-point SPX rally from the low on the 1^st looks more impulsive than corrective. There are 2 reasons for my concern. First of all, if the SPX completed an irregular flat correction as I suggested in yesterday’s update, then that rally would have been a C-wave and C-waves are 5-wave moves just like any other impulse waves. Second, while stocks and bonds may not have much of a correlation when stocks are rallying, they usually do when stocks are headed down and it is an inverse correlation, so until I feel comfortable that we are not about to see a massive impulse down in equities, I don’t care to get too aggressive on the sell side of the bond market. I still suspect that the treasuries may be in a 5^th wave rally, but now I’m not so convinced that the top is this week – or even next.

For now, I am most concerned with the wave counts and structure. Below are 2 charts of the 10-year, the first is a 180 minute chart and the second, a 30 minute chart. On the first one you can see the entire rally that began on June 3^rd where I believe a large 4^th wave low was made. You can see a clear 5-wave advance into the highs on Friday. The second one shows the last rally in more detail including the Fibonacci retracement targets below. Pay special attention to the action since the highs on Friday which looks to be very corrective since there are only 3 waves off the top and the 10’s have already traded high enough off of yesterday’s lows to eliminate any chance for the break to become an impulse. If they break down, they break down, but the shortest wave patterns are suggesting that they don’t and that the last rally is only a wave-1 of the bigger 5^th wave.

<chart>

Now compare the first price chart with the yield chart below. It is the cash 10-year on a 180 minute chart and you’ll see how far it fell short of making a new yield trough on Friday. It’s isn’t that it can’t have been a failed impulse wave, it clearly can, but it fell far enough short of the extreme seen on 7/01 to force one to at least consider either of 2 possibilities; one being that the high could have been made based on the futures chart with the other suggesting that there are still several rallies left, suggested by cash as well as the 30’s. Now with a corrective look to the pullback, it seems that the more bullish outlook may be the one to trust. It is that short-term structure from the extreme on Friday that forces me to expect new highs and wave theory that says they will be more than incremental and that will likely be the case unless the Fibonacci retracement targets on the chart above area all violated.

<chart>

This week is void of much in the way of scheduled news releases. There are some housing numbers and there is testimony by Chairman Bernanke tomorrow and Thursday but still, the markets are basically unencumbered by economic indicators and free to trade as they will. This morning the equities are softer and the treasures have an accompanying bid. On any new highs in futures, I would expect a move up to the next real resistance at 123-20 but the cash still needs to overcome the current yield trough at 2.883 as do the 30’s at 3.826. The wave patterns don’t have to work all the time, nothing does, but the wave structure since the lows on the 13^th is clear; it suggests a larger rally may be unfolding. At the same time, while the patterns in stocks are not quite as clear to me, if the SPX trades through yesterday’s lows, the first support of any significance at 1055 will likely be tested and if it doesn’t hold, I would expect treasuries to continue their march higher. I’d be using 122-21 as my money management stop on any long trades today. Should the 10’s push to new highs above 123-13+, I’d be looking to sell into the 123-20 area but just trailing the market with about a 9 tick stop would makes sense to me as well.

7/19/10 – 8:15 – By the close of business on Friday, I could have made the case that the rally in 10-year futures was done based on an apparent 5-wave rally to new highs from the lows on the 13^th. The problem with that count is that the 10-year futures are the only fixed income chart I watch that made new highs of the move. In addition, the 10’s and 30’s had weekly closes with new handles, the first time since April of 2009 in the 10’s, and I have no interest in fighting that. I suspect we trade higher this week and will be looking for a place for the trend to end but without having made new highs in the 30-year, I can’t rule out that we have only seen the first minor leg of another impulse so I don’t want to jump the gun. I would be willing to sell against solid resistance, the first as far as I am concerned being near 123-20 in the 10’s, but even there a great deal of caution will be in order. I would be more comfortable if the cash 10’s as well as the 30’s would make new highs and that means another 10-12 bps at the least. The big break in stocks clearly helped the bond rally on Friday and will have some say as to whether or not bonds actually do fail. As ugly as Friday was for equities, they have not yet dropped enough to rule out a continuation of the rally but at least now all of those negative technical indicators that came from volume and TRIN in particular need to be taken a little more seriously.

While the 10’s were rallying half a point on Friday and the 30’s just under ¾’s, the Dow lost 260 points while the SPX gave up 31. That’s nothing to sneeze at and we should find out very quickly if the stocks have anything left in them or if they are impulsing down to what can easily be a test of the mid to lower 900’s basis the SPX. That 1099 wave equality target worked beautifully even if it begged to be taken out after having held on 3 consecutive days and now the burden seems to have shifted to the bulls to stem the decline before the SPX trades below 1040. There should be support near 1055 but I need to see an impulse up of some degree before I will trust the stocks since if they give up now, I would expect the break to be a hard one and one that could change everything with regards to fixed income. Below is a chart of the SPX which I am posting to show you where I came up with the 1099 objective as well as the potential 923 that I am watching now. The chart shows a 5-wave decline from the April highs, followed by a potential ABC correction. In this case, the correction would be called an ‘irregular flat’ since the B-wave took out the low of the preceding impulse wave. I mention that only because while lit may look unusual to see new lows considered to part of a correction, it really isn’t and it is a valid wave pattern. From the 5/25 low shown on the chart with a ‘5’, I have labeled the potential ‘ABC irregular flat’. The C-wave would have equaled the A-wave at 1099/1101, the target being shown here in magenta and with the label ‘100% (1101.36)’. The 1099 comes from using the second low, the one in June, to measure from. I did the calculations using both and giving me a range from 1099 to 1101. The difference is very small and pretty academic as far as I am concerned. The important point is that the target worked and now that we have failed from a perfect target for the end of a correction, I am concerned that we are about to see another 5-wave decline. If the first 5-wave decline was an A-wave, then the wave equality target for the C-wave is created just like the one that produced the 1099/1101 target and is also shown near the bottom of this chart, again in magenta and with the label ‘100% (923.17) ’. And keep in mind that it is a bullish objective since it assumes we are headed down off the highs in an ABC correction. It could just as easily be an impulse into a new bear market. One way or the other, I would not want to see the stocks trade below 1040 if I were long and in fact, anything under 1055 is a strong warning that more selling is likely.

<chart>

So we enter this week with most indications pointing towards still higher highs in bonds. While the rally out of the low on the 13^th can be counted as a 5, it would be unusual for the last rally to fail to produce new highs in everything but the 10-year futures so I am not yet about to give up on them. The 10’s have closed higher for 3 consecutive days and each day produced better than average volume. Open interest is beginning to expand and even the daily stochastics have turned back up. The indicator that I showed on a chart last week, the one that looked like a moving average (but isn’t), has turned back up leaving me without anything bearish to point to other than potentially mature wave patterns. I would be concerned if the cash markets went to new highs and then failed and closed lower on the day. That alone might not suggest an end to the move but I would not fight a reversal from a good resistance target in here. I had mentioned on Friday that I felt like the highs of the move were already shown on my support and resistance tables listed below and I still feel that way (they have been adjusted up a bit due to Friday’s higher close). A failure below 122-08 will concern me even if it comes without new highs. And the engine that may drive the markets this week, the stocks, have that support at 955 and again at 940 beyond which, I would not be too quick to sell treasuries.

7/16/10 – 8:15 – Impulsing back up towards new highs is about the only wave count that can be applied to all of the treasury markets at this point – well, all but the 30-year cash which threw us a curve ball a few days back. The 10-year futures never did look any different and I’ve always felt they were the best market to use for wave counting which begs the question ‘why did I ever doubt the bullish count’? That’s easy to say in hindsight. In about 30 minutes I may have to use my hindsight again but I doubt it. The numbers that came out yesterday, at least those that can be counted on to move the markets, were mostly bullish surprises for fixed income and just the opposite for stocks and both markets reacted accordingly. Now, even a slightly lower close today would be very friendly since we are trading with a 3% handle on the 30-year and a 2% on the 10’s. The 5-year posted a new high of the move and I suspect that the other maturities are soon to follow. I’ve always felt that we were in a 5^th wave rally from either June 3^rd or June 21^st and it now appears that June 3^rd was the correct call and that the next round of new highs will only be marginal ones. If I am wrong, I suspect the error will show itself when the rally in treasuries just keeps right on going and I have to adjust the wave counts accordingly but I’ll deal with that possibility only if forced to. I don’t expect to see a high today, but as long as the cash continues to trade with the current yield handles, I would expect to see one sometime next week and probably early in the week. The first leg of what I am calling a 5^th wave out of the low on June 3^rd, lasted just 3 days and today is the 3^rd day of this rally. The 2 don’t need to be the same but they are likely to be similar. Factor in the good weekly closes, should we get them, and I would think Tuesday is a good day for a high. That’s if we have, in fact, been in a 5^th wave since June 3^rd. The alternative would seem to point to the initial impulse having ended on 5/25, which would suggest much higher levels await us and no time soon. I think that is far less likely but assuming we do rally into new high ground, I still would want to see the appropriate wave structure before I got too aggressive on the sell side. If my preferred count is correct, I do believe the highs seen will be at resistance levels included in the tables below.

I mentioned yesterday that there was a gap fill area in the S&P futures at 1077 that was the first area of any significance as far as support goes. The low tick yesterday was 1076.25 from which they rallied more than 15 points. I don’t have a firm opinion of where stocks are in a short-term wave count but I do suspect that they are some sort of a corrective rally. I see a lot of reason to question how far the rally can carry based on the internal indicators but one thing that is obvious is that the price action remains good. I mentioned yesterday that there was a wave equality target at 1099 and that the high of the day for both Tuesday and Wednesday was at 1099 and yesterday it came in at 1098.66 so while the level is working so far, it’s difficult for me to trust triple tops – or bottoms – since they are so corrective looking. Should 1099 be exceeded, at least that index will look to be in good shape. I would still like to see the Dow make it through 10,450 if I were long.

And as for the best news I’ve heard in nearly 3 months, BP announced yesterday that oil stopped flowing into the Gulf at 2:25 C.S.T. With that announcement, the stock rallied $2.50 in the last 20 minutes of the day to finish up nearly $3.50. It traded into that gap I had mentioned back on 7/07, one that runs from 37.12 to 42.47 on a daily chart but more importantly to me, from 39.41 to just 40.61 on a weekly chart. Remember the bottom came at a weekly gap fill to the penny at $26.75. The high tick yesterday was 39.81 which was also just .14 from the 38% retracement of the entire decline from the pre-explosion high. I had also mentioned a week or so ago that I felt some degree of an impulse wave had bottomed but I didn’t yet know what degree it was. That’s still how I feel and while I may have mentioned that $40 look like a very intriguing as a sell area, you’d need to be a real gambler to take that bet right now. Aside from all the technical talk, it’s just good to see those pictures from the sea bad that don’t show oil gushing out of the fractured well.

The 10’s look great and need only to stay above 122-05 to retain their positive look while cash now needs to hold 3.063. I like the resistance at 123-20 for the futures but if the numbers are good, or if the stocks get hit, or if the treasuries just decide to rally for no good reason at all, I’ll be looking at all of the support/resistance levels on the table below with my focus on any of the large, bold, intermediate resistance levels listed in 10’s or 30’s - cash or futures. If any one of them holds and produces any sort of a pronounced reversal accompanied by closes near the lows of the day, I would not risk long exposure over the weekend. And regardless of where we go on the upside today, closes that include failures of cash to hold the current handles would be worrisome as well. Have a nice weekend.

7/15/10 – 8:15 – I had said yesterday that ‘with a gun to my head, I’d be short’. Mercifully nobody pointed a gun at me but it felt like it, watching the 30’s move a point higher. Despite the rally, however, only the 10-year futures still appear to clearly be correcting from the highs as the cash 10’s and 30’s as well as the 30-year futures appear to have 5-wave moves down from the price highs on 7/01. The 10’s look like a new high is imminent but that it will be a 5^th wave and done quickly. So heading into a half dozen or more numbers in the next 24 or so hours and the cash 30’s are saying the highs are in, the 10-year futures are saying they aren’t and the other 2 charts I focus on are inconclusive with wave patterns that can still go either way. That can’t still be the case after tomorrow morning – can it? To me, the best thing that happened yesterday was that the 30-year cash bond closed back on the positive side of the trend-line that it had gapped over on Tuesday so maybe the trend hasn’t been broken after all. And it did it with the best volume it has seen since the highs. The next 2 days should tell the tale.

It’s hard to imagine that the Fed would tell us that they’ve lowered their expectations for inflation, as was revealed yesterday in the Fed minutes, and then in the 2 days that followed we would see upside surprises in PPI and CPI so I guess I expect to see market friendly news, at least from those indictors. That idea would make me lean in the direction of trusting the 10-year chart but I think the correct posture is to head into the last 2 days of the week with the mindset that new lows below those established on Tuesday would be a strong suggestion that a high is in for a while, still using 122-14 in the 10’s as an indication that they are not. By Friday afternoon, we need to be paying attention to the 3% handle in the 10’s and the 4% handle in the 30’s to see if they can finally be broken on a weekly basis. The 10’s have gone 14 months without a weekly close outside of 3%.

Yesterday saw Retail Sales come in weaker than expected and that helped bonds as did the Fed Minutes which showed downward revisions of their expectations for growth as well as for inflation – in defiance of my 30-year/10-year yield spread chart from Tuesday – and they also raised their projections for unemployment. So against that backdrop of not very encouraging news what did the stock market do? It closed mixed with the Dow a tad higher and the SPX barely a tad lower. The Dow has now rallied just under 800 points in 6 days (mistakenly identified as 400 points in yesterday’s update) and a Fed forecast for poorer economic growth and higher unemployment didn’t result in a lower close. Go figure. The stocks have some interesting levels just above where we are that merit watching even if the price action of late seems to render resistance levels meaningless. The SPX traded up to 1099 both yesterday and the day before while a wave equality target exists at 1099.97. The Dow meanwhile, has a 50% recovery target at 10,436 and a wave equality target at 10,450, yesterday’s close having been 10,367. None of the targets that I have identified so far have even slowed down the rally and if these can be overcome, we could see a good extension of an already impressive move. Volume in stocks was disappointing again yesterday although there was an increase in open interest on Tuesday and that’s a positive development. The TRIN indicator that I mentioned in yesterday’s update actually lost more ground, enhancing the bearish divergence. Now seems like a good time to remind myself that the formula for a bearish divergence is higher prices accompanied by lower readings on an oscillator and while prices are only half of the equation, in many ways they are the only half that matters.

No charts for today but by tomorrow morning I’ll try to post a chart or 2 showing what appear to be the best counts going forward – assuming anything changes. The 10’s have an overnight high at 122-14+, right up against my ‘break’ point that would indicate higher highs are on the way but the truth is, if I view that chart alone, they already appear to be forthcoming. I’ll stick with the notion that any trade above there would tell me that new highs are likely across the curve while using a trade below 121-25+ as a leading indication that they are not. Confirmation in the 10’s, however, will still come with a trade through 121-07 (3.151). Stocks look strong but overdone and I wouldn’t ignore the above mentioned resistance targets and especially if a break in the S&P futures carries them below 1077. That’s not an end of the world trade but it is a gap fill level and if exceeded, it would be the first solid support area that has given way during the entire explosive rally that began on the 1^st of the month, nearly 100 S&P points ago.

7/14/10 – 8:15 – For starters, I really did know that Retail Sales was scheduled to be released on Wednesday and not on Tuesday as I posted in yesterday’s update. What I didn’t realize when I wrote it was that yesterday was actually Tuesday. Anyway, Retail Sales is, in fact, scheduled for release today but without bothering to wait for it, the treasuries took it on the chin yesterday and in all honesty, they look to me like you can ‘stick a fork in em’. I know the 10’s haven’t yet traded through 3.151 in cash or 121-07 in futures and even the 30-year futures held their necessary level. Only the cash 30-year broke down through the equivalent and that shouldn’t be enough to justify “you can stick a fork in em”. Nonetheless, I hate how the treasuries look based mainly on that cash 30-year chart (posted below). Not only did they close well through their impulse ending target at 4.085, they also closed well through their 62% retracement of the last leg up after an opening gap that lifted them right over the trend-line drawn off the April yield crest without them even touching it. It’s just a terrible looking picture that I am having trouble getting past. As far as my other treasury charts go, the 30-year futures traded through their 50% correction as well as through their trend-line but managed to recover enough to close right on it. The 10’s broke through their previous lows at the 38% level but didn’t make it to their 50% target while the cash 10’s broke through their 50% target. Neither of the 10-year charts broke their trend-lines but the cash needs only another bp as the line there is at 3.126 today. So what the treasuries did in general yesterday was to gap down, never test their opening gaps and then break through what should have been solid support numbers and close near the lows. Also disturbing is the fact that on Monday, the 10’s traded up into a 5 ½ tick gap but failed to fill it by 2 ½ ticks. Then in the overnight session, they traded up 12 ticks off of their lows to the exact same price, 122-11, but nobody stepped up and pushed them those last 2 ½ ticks and that gap remains. While the 30-year cash may be the only market to have signaled an end to the impulse wave, I’m worried that it may prove to be a leading indicator. Following 3 days of incredibly quiet markets with no news to trade on, and yet prior to 3 days of an overloaded eco calendar, traders either think that they know something or they’re afraid to find out. And more importantly to me is the fact that for now, the decline appears to be a 5-wave move – at least in the 30’s - and that would suggest that it is in the early stages of a larger correction, or else the early stages of an impulse up in yields. Yes, I can be proven wrong in about 20 minutes but with a gun to my head, I’d be short.

The volume yesterday in the 10’s was much better than it was during Monday’s rally and well above average. Open interest is a little difficult to read in the sense that there has been a mix of up and down days but the fact remains that since the highs 8 days ago, it has expanded and that’s not good, although I don’t yet know what happened yesterday, easily the biggest down day. Daily oscillators continue to point down and they have a ways to go to reach oversold while the weeklies have barely budged off of their overbought highs where they have been parked since late April. A favorite indicator that I watch turned negative on the 8^th when I was still in the ‘show me’ mode and I didn’t trust it (I’ll put that indicator on the chart below) but now it looks much more menacing. At the end of the day, a lot of things are suggesting lower prices ahead while about the only positive I see is that the 10’s have yet to confirm that a top is in based on wave theory and still have a potentially corrective look to their decline.

The stocks had another one of those days, much like the last several, whereby they made solid gains and closed very near their highs but with questionable technicals. The volume on the futures contract was less than average even if it was a little better than on Monday and the daily range, excluding the overnight session, was a mere 9.75 points. Open interest is still below the crest it made at the bottom and that remains troublesome. The SPX posted a high trade at 1099, which was well through my first objective of 1091 but just barely above the second, the down-trend line from the April highs at 1097, and they closed back below it. The Dow soared through its’ 38% retracement as well as through the trend-line and the high tick of 10,407, was still about 32 points shy of the 50% target. A TRIN oscillator that I watch is showing negative divergence as it remains below the highs it printed on the 7^th, when the S&P closed at 1059, nearly 40 points ago. Having broken above some key levels yesterday but with more still to come, it may be too early to let one’s guard down but the truth is that price action is quite impressive even if the internals supporting it are not.

So this morning we get to see Retail Sales, Import Prices and Business Inventories and then Fed Minutes in the afternoon, widely expected to show lowered expectations for economic growth and then tomorrow, it’s a bunch more and it all finally ends on Friday with CPI so no matter where the markets are now, they may not be there for long. The technical indicators can be wrong - or I could just be reading them wrong - but based on how things look to me, I think I’d be playing the short side of fixed income unless I could see the 10’s rally above 122-14, but if that trade is too far away to wait on, a trade above 122-02 should be used as a warning sign. As far as support goes for the 10-year, I think 121-13/14 is a good level with the next stop likely to be 121. There is further good support at a trend-line, the value of which is 120-23+ today and while I can go on and on with them, if the first one doesn’t hold, then the 10’s will likely be telling us what the 30’s already are; that the impulse wave is over. In stocks, look for resistance in the SPX at 1115, 1130 and 1140 while the Dow has targets ahead at 10,436 and then 10,594/10,630. As far as support goes, the Dow has run nearly 400 points in just 6 days, the SPX about 90 and that leaves them very vulnerable to bad news. The first levels that matter in the SPX are around 1070 and again near 1060.

I’m posting a chart of the cash 30-year today just to show you the picture that has me concerned. There isn’t much I need to say, ‘a picture is worth 1000 words’. Well, that’s not entirely true. The trend-line is self-explanatory but the rest, maybe not so much. The horizontal blue line is the level that needed to hold if the rally in prices was to continue based on wave theory (remember it did hold in the 10’s). Retracement targets are shown in red and one may very well be where this pull-back holds - presuming this is just a pull-back. And I have included an indicator that needs some explanation. It’s the indicator that I referred in the second paragraph above and appears as a red and blue line that runs through the price action. It may look like a moving average but if you examine it closer, you will see that it isn’t, since it will sometimes react to a change in market direction very quickly like it did at the April yield crest, while at other times it seems to ignore turns that it thinks are only temporary as it did from late May into early June. Very simply, when the indicator is red, it means down and when it is blue it means up and since this is a yield chart, red means be long the 30-year and blue means be short. As you can see, it turned positive just one day after the yield crest in April and stayed that way for all but 7 days of the entire rally. Now it has turned again. Interestingly, it didn’t really react to the price move yesterday although it remained blue.

7/13/10 – 8:15 – Beginning tomorrow and running through the remainder of the week the eco calendar is jam-packed full of important news. The headliners would seem to be Retail Sales, PPI and CPI but there are plenty of others capable of moving the markets beyond what I believe to be key levels. I’m sticking with 121-07/3.153 as the areas that must hold in order to retain a friendly near-term wave count while using a trade above 122-14 to indicate new highs are on the way. Yesterday the 10-year futures traded up into the gap they left on Thursday but couldn’t manage to fill it while neither the cash 10’s nor the 30’s managed to even touch theirs. While it will take a trade through 122-14 to confirm that the pull-back has been corrective, it already appears that way to me. Regardless of which way we break – above 122-14 or below 121-07 – either should be followed by a reasonable extension in that direction. On the upside, I think we could see 123-20ish rather quickly while a trade through 121-07 would suggest to me that the 119 handle is just around the corner. Either way, we could easily see one of those 2 extremes before the week - or perhaps even the day - is over. And potentially equally important over the short-term are those targets that I posted yesterday in stocks at 1091 SPX and 10,242 Dow. If you recall, back on the 21^st of June, the SPX traded to 1131 with a target at 1130, before it failed miserably and made new lows of the move. These targets are very similar to that 1130 target and must be respected. Key levels below are not so clear to me but the first layer of support of any significance is near 1060 SPX followed by 1040. The Dow has good support $40 either side of 10,000. I think it’s important to keep all of these levels in mind as we navigate through the 8:30 time slot for each of the next 3 days.

Stocks ground higher yesterday and once again it was on poor volume. This is likely due to either a combination of summer patterns as well as all of the upcoming economic releases that for stocks include a healthy dose of earnings reports, otherwise it could prove to be a very ominous sign. Along with the declining volume came another small daily range. If there were some down days showing the same lack of participation it would be easier to attribute it all to the time of year but as it stands, the major indices have had 5 consecutive higher closes and the higher the markets go, the lighter the volume seems to get. I have mentioned on several occasions the targets/resistance at 1091 and 10,242 in the SPX and Dow. Given that we are sneaking right up on them, I should mention that above each of those, there is a trend-line drawn off the April highs that is currently at 1097 SPX (dropping about 2.3 points per day) and 10,339 Dow (down about 17 per day) and beyond that, 50% retracements at 1115 and 10,438. A burst through any of these targets could attract more interest and it needs to since regardless of the reasons for declining volume, a move in either direction won’t last too long if it is not well subscribed to.

One feature in the equity markets yesterday that begs for me to address was an upside gap in BP of about $1.25 that proved to be just the beginning of a very strong day, one that saw that stock finish up about $2.70. It is now about $10 off of those gap-fill lows from late June. Yesterday was also the third time since the bottom that it traded into a gap and then pushed right on through to close above the top of it. I had mentioned a few days back that a gap in the area of $40 looked very interesting and it still does. That one runs from 39.41 to 42.47 on a daily chart, but from 39.41 to 40.61 on a weekly chart and that is the one that first got my attention since this rally began when BP filled a weekly gap left 14 years ago. There is also the 38% retracement of the entire post-disaster drop right in the middle of the weekly gap at 39.95. I had also remarked last week that I felt that stock had bottomed in an impulse wave of some degree and it will likely be in the vicinity of $40 that we find out just how important that bottom really is.

Getting back to the treasury markets, while Retail Sales is due out within the half hour, I decided to take a look at the yield curve since PPI and CPI are due to be released tomorrow and Friday. Lately, the monthly inflation numbers have come and gone without too much in the way of any inflation scares. In fact, there has been more talk of deflation than there has been of inflation. So I decided to take a look at the yield curve which is in many ways the best indication of inflation expectations; the greater the expectations for inflation the steeper the curve. What I found was a yield curve that suggests that more than just a few investors must think that inflation is still an issue to be dealt with. The chart that I am posting is a monthly chart of the spread differential between 30 and 10-year yields, using the symbols TYX and TNX generated by the CBOE. With yields of long-term treasuries relatively close to all-time troughs, one fear that has hung over the market for a while has been the fear that all of the stimulus and all of the debt will eventually manifest itself in the form of higher interest rates, likely due at least in part to inflation or inflationary fears. Inflation or fears of it will cause fixed income investors to seek higher returns for longer maturities and that means not just higher interest rates but also a steepening of the yield curve. And while there hasn’t been much in the way of data suggesting any such fears are currently warranted, this chart seems to suggest otherwise. I always have to warn readers that the symbols that I use for yield charts are off by a decimal so that 30.50 really means 3.050% and on today’s chart the same thing is true so that the last trade that you see, 9.94, reflects a spread differential between the 30’s and the 10’s of 99.40 bps. So with that in mind, take a look at the chart and you will see that at 99.40, this spread is near the highest level seen since at least the 1970’s! And as you can see, this general area stopped each of the previous cycles. This is certainly not a chart that you would use to argue there was deflation on the way and in fact, if you think that there is, then this is certainly a good level to place a bet by buying the long end and selling the short end. In fact, historically this appears to be a good place to make that bet even if you aren’t making a bet on deflation. One thing that does catch my eye when I look at this chart is the fact that since 1981, the spread between 30’s and 10’s has made higher highs and higher lows and that seems to point to a continued steepening trade, one that would fly in the face of the deflation argument. And I might add that the slope as measured by the spread of the 30’s to the 5’s or the 10’s to the 5’s looks very much the same. This spread relationship is one that I will try to stay abreast of.

<chart>

7/12/10 – 8:15 – The treasuries remained near their pull-back lows all day on Friday which proved to be a very quiet and uneventful day in just about all of the financial markets. In fact, you have to go back into April to find a day when the 10’s traded in such a tight range; just 10+ ticks. Stocks were no different as the 10 point range in the SPX was the second tightest I could find since 4/26, the day of the top and at a time when the daily ranges had been conspicuously shrinking for a while. I’m not implying any need to relate the two time frames as back in April, the ranges had been contracting for months and I felt that was leading indicator back then but for now, it seems to be more just a product of the summertime blues in all of the markets. As mentioned in Friday’s update, I don’t think it is constructive that neither the 10’s nor the 30’s could sustain their pushes through key handles for even a week and while at least the short-term patterns continue to allow for still higher highs, this is a critical time in these markets. In the bigger picture the 10-year has traded with a 3% handle basis weekly closes since 5/01/2009. Given that yields rose 200 bps heading into that 100 bp trading range, I am not optimistic about how it will ultimately be resolved but if there is to be any breakout to the downside in yields, it should come relatively soon – likely this week or next week at the latest.

While in many ways stocks seem at times to hold the bonds hostage, I couldn’t help but notice that from May of 2009 to April of 2010, the same time frame that saw 10-year yields go from 3% to 4% to 3% and back to 4%, the SPX went from 877 to 1220 with very few and only very shallow pullbacks; not exactly a correlation. Since April, however, the stocks have gone from 1220 to just over 1000 during which time the 10-year has traded from 4% to below 3% even if it remained below 3% for only a few days. The lesson to be learned may be that that there is indeed a correlation between stocks and bonds – when stocks are headed down. And when looking at a weekly chart of stocks, I was also drawn again to the ranges. At the top in April, the average weekly range for the SPX, based on a 10-week moving average, was just 26 points and in fact during most of the 13 month rally, it was in the 25-40 point range. It is currently at 67 points, having expanded dramatically since the week of the highs. Last week’s range was 57 points despite summertime trading and the especially quiet day on Friday so that is still in the high category and that may be helping to keep at least some of the bid to the treasury markets. Taking a glance at a few indicators for stocks, I do see that open interest in the S&P futures contracted markedly last week as the market came away from the lows and that each day that they rallied, the volume declined. Higher prices with contracting volume and open interest is a pattern that any book on technical analysis would tell you to fade and while I’m not sure that I agree with the implications based on wave patterns, at the very least the volume and open interest should be a concern. And stocks are also approaching some nice targets as the SPX, which closed at 1078, hits its’ 38% retracement of the entire decline, at 1091. The Dow meanwhile, closed at 10,198, just 44 points from its’ equivalent. Daily oscillators are still pointing higher so maybe the more bearish indications from volume and open interest can change and maybe stocks can overcome the resistance/targets just ahead but until they do, I’d be careful of the equities and I guess, of any short exposure to bonds.

The poor volume in the stocks on a higher day on Friday may be reason to be concerned about them while just the opposite is true of bonds, which saw the same drying up of volume but on a down day. Again, these patterns are usually reliable but seasonally, we are in the ‘summer doldrums’ and poor volume may just be a sign of the times. That said, in addition to the 10’s closing lower on poor volume, they remain in a very well defined channel from the highs and still retain a wave pattern that can be construed as corrective from those highs. They have yet to trade below their 38% retracement of the most recent rally at 121-25+ and if they do, there should still be good support from an uptrend line at 121-17, a line which advances by about 4 ticks per day, as well as the 50% retracement at 121-13. I keep mentioning that a trade in cash through 3.153 is a pattern breaker but don’t know if I have posted the equivalent in futures which comes in at 121-07+. If the treasury markets are going to come under any pressure at all this week, and I suspect that those closes through 3% in the 10’s and 4% in the 30’s will make it happen, then we should find out what lies ahead rather quickly as the remaining supports as well as pattern breakers are just not that far away. Any trade above 122-14 would ‘seal the deal’ as far as the decline from the 7/01 highs being corrective. Daily oscillators remain pointed down but they are still at very high levels and that is disturbing. Resolution of all of these patterns should come soon but while we wait, I will say that as far as my preferences for analysis go, I’ll go with the wave patterns first, followed closely by volume analysis and only then would I rely on oscillators. For now, it can still go either way but that won’t be the case for long. Once I feel confident that the highs of this push are in, I will go more deeply into the potential implications of a reversal of trend at this juncture. As always and as it should be, there is definitely a bullish case and a bearish case to be made once the impulse wave that began in April comes to an end. Wave structure of the pullback should tell the tale Simply put, if we come away from the eventual highs in a choppy fashion, we can still see much better levels but an impulse wave developing from any high could suggest that that the rally that began in April may be terminal.

I’m attaching a daily chart of the 10-year futures with the stochastic oscillator as well as a volume histogram at the bottom. They don’t need much in the way of explanation as you can clearly see that the stochastics are headed down from the most overbought readings they have produced at any time during this rally. At the same time you can see that volume deteriorated significantly at the end of May and it has not supported the last leg up in prices. At the same time, it seems to be continuing to deteriorate as we’ve backed away from the highs. At 121-07 my indications will be that a high is in place while I also believe that any new high during this cycle will not be by much, will not hold for very long and it should be followed by at least another test of the 119 area. I also believe that if that last sentence is to be proven incorrect, the most likely reason will be due to a failure in the stock market.

<chart>

7/09/10 – 8:15 – Well, things are beginning to get a little more interesting. The 10’s traded down to 121-26+ while a range of 25 to 29 was the highest support zone that I felt could be meaningful. That 26+ low was just a tick shy of the 38% retracement of the rally out of the 6/21 low. In an unusual display of a parallel move along the yield curve, the 30-year also fell just 1 tick shy of its’ 38% retracement. The cash 10’s barely penetrated theirs while the cash 30’s nearly made it to their 50% level. The reason that I’m pointing to all of those markets is to show that yesterday’s lows came in at solid targets everywhere I look and that tells me that they should be respected even if they did come a bit too soon for my liking. I would have preferred to see those trades occur a few days further down the road and won’t be too surprised to see them exceeded but I would not advise ignoring the potential for them to hold either. The good news is that buyers surfaced at the first likely bounce point and that is what we should want to see even if those lows don’t hold. While they bounced off of those levels yesterday, the treasuries are testing them once again this morning. And while the treasuries were coming away from low ticks at such good levels yesterday, the S&P futures were backing away from a trade at 1067.65, just a point above a wonderful target there, one that represented both a 50% retracement of the recent break as well as a gap fill left from 6/29. Great targets producing reversals in stocks and bonds on the same day - but are they really reversals? Another new high in the stocks would seem to create a 5-wave move off of the lows and that would be a bullish development and one not likely to help out the bond markets, while 1038.50 remains the level that needs to hold to keep the door open for an impulse to the upside. In the 10-year, a trade above 122-14 would take me out of any short exposure I might have while a push below 121-25 might be a good place to exit any long exposure for today.

Volume in the 10’s expanded during yesterday’s break but it did just the opposite in the 30’s so I am just going to ignore that for another day. Stochastics continue to head lower but they are only just reaching the overbought line, coming down from an extremely overbought condition and showing no signs of an impending recovery. They seem to be more in sync with my wave based notion that a low is still days away or longer. No new clues from open interest which expanded into the highs and then expanded further as we backed away from them on Wednesday. Should the 10-year break below 121-24+, then I would look for a test of the 50% correction level at 121-13. At some point below there, one would have to wonder whether the absence of an initial 5-wave decline from last week’s highs won’t prove to be a case of not seeing the forest for the trees but still, my current preferred count only breaks down with a trade through 3.153 and that’s just the way it is.

I’ve read from what I deem to be a reliable source where a 2-year cycle low is due in stocks next week and while cycles of that duration don’t often bottom right on time, that may prove to be good analysis and the reason why stocks didn’t get the follow-through to the downside that my interpretation of the wave theory would have suggested. That doesn’t mean we’d be ready to rally for the next year as the same source still looks for a larger cycle low beyond next year that could test the lows from 2009 but still, if true, it should produce a rally of some significance. Right now the move off the lows is not a clear impulse wave but it will look more like one if we can trade above yesterday’s highs. I won’t say that would take the heat off equities altogether but it would force me to look to a new wave count.

One thing that really strikes me about the treasuries is that yesterday, the 10-year closed with a 3% handle for the first time since it gapped over that level on 6/29. At the same time, the 30’s move back above 4% for the first time since they gapped over that level on the same day. If you look at the markets from a longer-term perspective - using a weekly chart - what you see in the case of the 10-year is a market that came away from a stab above 4% on just one weekly bar in April before reversing and now we have a stab below 3% on just one weekly bar, at least for now. Those handles can prove to be very important, especially to longer-term traders. I would think that minor patterns notwithstanding, a close through those major handles today would be reason enough not be long over the weekend. A close in the 10-year futures above 122-10 would offer up a rather risky signal to be long.

7/08/10 – 8:15 – Yesterday did nothing to change the wave structure which I believe to be corrective from the price highs from last week. I might have been able to make a case for an impulse down in price had it not been for the gyrations that occurred immediately after the jobs report on Friday but the swings are there and there is nothing that I can do about it so I still see new highs on the horizon. If they don’t come very quickly – and it may already be too late - then I would suspect they won’t come for several weeks. I hope to make this clear with the charts at the bottom of this report but for the moment, let’s just say that we appear to be correcting from the highs with more upside to come. Stocks meanwhile had a really strong day yesterday following the failed rally attempt on Tuesday and that certainly isn’t helping the bonds move higher but at the same time, the stocks still have some obstacles to overcome on the upside which I’ll get into momentarily.

Volume and open interest in bonds over the short-term are about as inconclusive as they could be. The general decline in volume over the longer-term, which I talked about on Tuesday, is still very apparent but the last several days are showing no real features. Daily stochastics remain overbought as they have been since the 24^th of last month and with some bearish divergence. Still, other than that I just cannot find a solid reason to think that we cannot push at least a little higher. Maybe that’s reason enough but without evidence from wave structure that we have crested, I must expect higher highs.

As I mentioned above, the stocks had a stellar day yesterday with the Dow gaining nearly 275 points and closing back above 10,000; the SPX gained a solid 32. That much of a rally signals some sort of low having been made at 1010 last week. The bearish count would have that low wave-1 of wave-3 with a real downdraft about to follow but in all honesty, that count wouldn’t have suggested such a strong rally was in the works so if that is where we are, I would expect to see a failure very quickly. A downside gap was left in stocks on the 29^th of last month although you need to look at futures to see it. That is due to the fact that the cash averages are made up of individual stocks and even on a weak opening, the averages appear to have opened unchanged since they can only reflect the true opening levels of each stock once they really do trade - and that doesn’t happen all at once. At any rate, the futures charts using day sessions only, show the gap clearly and it runs from 1055.75 to 1066.50. Coincidently, the 50% retracement of the decline from the 21^st is at 1066.75 so that is clearly an important area while the close yesterday was just below 1060. Much above there and whatever the stocks are doing, it is not likely the worst case scenario. Any trade above 1081 in futures will definitely push the case for a hard break down towards my target near 950 to the back burner while a trade back below 1038 would keep it in play. BP managed its’ second upside gap and close at the highs, in as many days. It also closed just .03 shy of filling a second gap above. I do believe that some sort of an impulse wave bottomed at that gap fill trade just over a week ago but don’t know exactly how to count it or if, in fact, it can be counted with any confidence. I’ll make an effort though and say that it looks like a 5-wave decline from the highs of 4/15, just days before the well explosion, may have bottomed. That high, however, was not the highest that BP had seen even in 2010, so I’m not about to call that a terminal bottom; at least not yet. While the close yesterday was 33.19, the best resistance target seems to still be a ways off, close to 40.

I think it is already too late for the 10’s to make a new price high of the impulse that began on the 21^st so that leads me to believe that we are either in a 4^th wave correction that could persist for another week or so, or that the rally is over but that doesn’t sit well with me since the pattern from the highs is not impulsive. That would seem to suggest that the correct count is not the one with the triangle for a 4^th wave but rather the one that I had always leaned on, one that said the last impulse wave began on 6/03. Hopefully this will make a little more sense when you look at the charts below. If that count is correct, then I’d look for a pull-back low no higher than 121-25/29. If that is more downside than you care to risk without really knowing if I am correct about another rally, then I would use a trade below 122-04 to exit any longs. The bigger picture will come clear soon, I promise.

I am posting 2 charts of the 10-year today, each with a different count highlighted on it. I think this is the best way to show the 2 alternative counts that I am considering. For starters, let me point out that these charts were printed during trading yesterday so they do not reflect the closes. The first chart suggests that an ABC correction commenced from the wave-3 bottom on 5/25 and ended on 6/03 where I have placed the label ‘wave 4’. From there I have outlined in red what should prove be the 5^th wave which is still unfolding. As you can see, I have labeled it with a wave-1 and a wave-2 that completed on 6/14, followed by waves 1, 2 and 3 of the third wave. It may well be that I am getting too cute with that count and that wave-2 actually ended on the 21^st where I have labeled ‘2 of 3’ but for now that is academic. In either case, the current low cannot be the end of the impulse but rather only the end of a 3^rd wave at best since there is still a wave-2 that began on 6/08 that needs to be offset by a 4^th wave. The important thing to understand about this scenario is that if the bigger wave-4 ended on 6/03, then we cannot make a bottom until a smaller degree 4^th wave completes and we make at least one more new yield low. In this scenario, I would expect to see the smaller degree 4^th wave to last about 8 days, give or take a few. If we aren’t making new low yields by early this morning, this would have to the preferred count.

<chart>

The next chart suggests that from the wave-3 bottom on 5/25, a triangle commenced that completed on 6/21. The triangle is outline in light blue with the individual legs highlighted in dark blue. In this scenario, the bigger 4^th wave would have ended on 6/21 and not on 6/08 and that would eliminate the need for any further correction since there is no large second wave to be offset by a 4^th wave. I could live with a new low today but much beyond this morning and the correction from the yield trough last week will have lasted just too long to appear to be a minor degree 4^th wave. That would suggest to me that the move down in yields from the 21^st has completed so if the triangle is the correct count, the entire impulse that began back in April could be done. Right now, the up-tick in yields does not appear to be impulsive so I am leaning in the direction of chart #1 showing the better count.

<chart>

7/07/10 – 8:15 – I’m not sure which day would best be described as a non-event in treasures since on Monday, in a holiday session, the 10’s gapped up from a 122-10 close on Friday to print 122-24 and close at 20+ before giving it all back yesterday morning. After gapping down to print 122-06+ early, they recovered to print a 122-25 high and close at 24. Actually there is no question as to which day was the ‘non-event’ since on Monday there was hardly any volume and the range was a mere 3 ½ ticks but take away either day and we’re still in the same place. Yesterday was another one of those days that you can pretty much blame - if that’s the right word - on stocks. The S&P futures traded as low as 1002.75 on Monday night, a new low of the move, before recovering to a high print of 1038.50 at 10:30 yesterday morning, about the same time that the treasuries made their lows. From there it was all downhill for the stocks as the SPX dropped 20 points by 3:30. The Dow traded from up as much as 170 in the morning to about 25 lower in the afternoon before recovering to close up 57 and of course with all of that downside in stocks, the bonds rallies nicely. What does all that mean? To me it means that nothing much has changed since last week. The stocks may have found some buyers but it’s difficult to call for any sort of bottom based on that price action and at the same time, the treasuries show few signs that any sort of a top is in place. As far as whether or not the action from late May to early June was a triangle, that seems to be a distinction without a difference, at least for now. From the yield crest on 6/21, it’s difficult to tell whether the 10’s have completed 2 or 3 impulses down in yield. The longer the yield trough from last week holds without a hard break away from it, the less likely is the triangle scenario and the more likely that the rally will extend considerably. A new low yield of the move today and perhaps even tomorrow could end the push from the 21^st, if it hasn’t already ended, but much beyond that and the better call would seem to be that this latest impulse began on 6/03 and that the best levels seen last week were only represented the end of wave-3. That would suggest that the end of the impulsive move won’t be seen for a few more weeks. For now it is just a waiting game.

The stock market is no easier to call for the short-term since while yesterday produced a higher close, the price action was likely a disappointment to any bulls. I still think that market is headed lower and maybe much lower but needing to overcome solid support at 1008 in the SPX. Don’t confuse that number with the 1002 low in the futures that I mentioned; so far the low in the SPX remains at 1010.91 from Thursday. If the SPX breaks below 1008, which I think it will, I believe it will be headed to 950, plus or minus about 8 points and if that area gives way, the next likely stop from my perspective will be in the 800’s. While on the subject of stocks, I think it’s a good time for an update on my least favorite stock, BP. As any of you who have been reading these comments should know, on 6/28 BP traded down to 26.75 which was a gap fill price, to the penny, from a gap left on the charts 14 years ago. The following day the low was tested but held by 20 cents and yesterday BP traded at 32.00. That’s a $5.25 rally in a stock that had been in a $35 free-fall and from a gap that very few people likely saw. Go figure. There are numerous gaps above to watch for and in fact one was taken out yesterday but the gap that held at the lows was an unusual one in that it existed on a weekly chart and even on a monthly chart. There is a gap above that shows up on a weekly chart that runs from 39.41 to 40.61 if any of you are interested. I am and will keep everyone posted.

For the near-term, I’d like to see a new high in price just to help clear up the wave picture. If it is followed by a reversal, I would want to clean up any long exposure. If the 10’s continue to gyrate in a range between 122 and 123, the probabilities of an eventual push down into the mid to upper 121 will increase but so will the likelihood of an eventual spike to a new high sometime late next week or beyond. Only a trade through 3.15 will negate further upside in the near-term but for now, even if the exact placement is unclear, most indications are that we have yet to see a top. If all of this talk of waves is confusing, give me another day of price action and I’ll post charts showing the several possible wave counts as I see them.

7/06/10 – 8:15 – When I posted charts of the 10’s and 30’s on Thursday and Friday morning, I hadn’t paid much attention to the triangle shown on the chart that I sent out on Friday afternoon. For that reason, I was expecting to see several more pushes to new highs before the rally could end. I did, however, mention that it would take a trade through 3.151 in the 10-year to put an end to it and that is still the case and now, a trade through 3.15 will not only spell the likely end to an impulse wave but it will also make the ‘4^th wave triangle’ about the only way to count the action from late May to mid June. And from a larger perspective, it would also suggest that an impulse wave that began in early April, when the 10’s were at 4.01, has come to an end; that based on the fact that the triangle must be a 4^th wave. Whether or not it will prove to be the only impulse won’t be known right away but for now, the support as well as the indications that something may be amiss remain the same as they were before Friday, at least as far as I am concerned. The 10’s have retracement targets at 3.045, 3.096 and 3.146 and a gap from 3.001 to 3.003 - and then that pattern ending trade through 3.153. The 30’s should find retracement support near 3.981, 4.029 and 4.076 with a gap from 3.993 to 4.013 with 4.085 being the ‘must-hold’ level there. I did make an incorrect statement in the afternoon update on Friday when I stated that the triangle theory only worked in the cash 10’s. While the pattern looks the best in the cash 10’s, in fact a case can be made for a triangle existing in any of the charts that I watch even if it does take a little imagination. I’m not yet ready to call it the most likely pattern but if these markets do lose their bid this week and fail to hold critical support, you won’t find me fighting the notion of a top being in place either. I will be most concerned about the structure going forward and if I see what I believe to be a 5-wave move down in price, I will become defensive even without a break of 3.151. I’ll for sure make a daily assessment of whether or not I think we are impulsing down or correcting down but when it’s all said and done, whether or not the 10’s hold 3.151 will remain my most important ‘indicator’.

If the 10-year breaks above 3.151 and the 30’s above 4.085, not only will pattern suggest that some degree of a top may be in, but if the treasuries cannot attract buyers at a 38, 50 or 62% retracement targets as well as at very prominent gaps, that alone would suggest that the underlying strength that has been in place of late has deteriorated at best - and disappeared altogether at worst. Just the last leg of the bigger impulse, the one that began on 6/14, covered nearly 42 bps in just 8 days with only one being a down day and it ended with a near perfect ‘doji’, a potential move ending pattern on candlestick charts. If all of that doesn’t describe 3^rd wave action, then it may well be suggestive of some sort of ‘blow-off’ and that is plenty of reason to respect either potential outcome.

As far as the stock market goes, Friday produced an inside day with a lower close and coming after such a strong and extended decline, there is just nothing to suggest that the selling is over. I have no problem seeing a rally develop off of that near approach to the 1008 support area, but I see nothing as yet that suggests that a bottom is in place. While the early indications were that the rally out of the lows on Thursday was corrective, last night the S&P futures traded at 1003 and this morning they have just come off a print of 1027, so at least they have attracted a nice bid. It will take trades somewhere north of about 1050/1055 to really take the heat off but with such a good start today, wave structure may give us a heads up long before we make it to those levels. If a low in the SPX were to hold for as much as a couple of days and then give way to new lows, that break could prove to be a real blow-out on the downside as it would appear to be the middle - or 3^rd wave - of a larger 3^rd wave and 950 would seem to be a very minimum objective from my perspective.

Yesterday, in overseas trading, the 10-year closed up about 10 ticks and it is set to give up much of that gain this morning; a likely product of the recent bid for equities. The good news is that yesterday’s bounce seems to have eliminated the possibility of an island reversal forming on today’s opening but that is a potential pattern that I do want to stay mindful of. The gap in the 10’s runs from roughly 3% to 3.03 and each day that it remains intact and that we close near it, is a day where some caution needs to be taken overnight. Should the treasuries continue to soften, I would look for support from that gap as well as the 38% retracement to hold, otherwise the notion that there is still more upside will take a hit. Those may not be ‘must hold’ levels but I would still want to see some buying surface should they get tested. In futures, the first level of importance seems to be near 121-25. Perhaps some good advice for the next day or so is not to go home with a lot of long exposure if the markets close near their lows. Thanks to some wild gyrations just after Friday’s jobs data was released, the look of the treasury markets from the highs on Thursday is best labeled as corrective for now but I’d like to get through another day of trading and still be able to make that statement – especially a day with a full deck of players.

Having spent some time looking at longer-term charts of both stocks and bonds, it is clear that volume has been deteriorating in both markets. It could be symptomatic of the ‘summer doldrums’ as they are commonly referred to but as a technician, I can only tell you that to fade a volume signal is usually a bad idea. I’m posting a daily chart of the 10-year futures as well as one of the SPX with volume plotted on a histogram below it. The green volume bars represent days when the market closed higher while the red bars mark the down days. There is a blue line plotted that is a 20-bar moving average of volume and that is really what I would want to draw your attention to. In the case of the 10’s, the average daily volume reached a peak on 6/01 and has decline by more than a third since then, mostly as the market rallied. In stocks, the average volume reached a peak in late May and while the decline has not been as dramatic as it has in bonds, the bulk of the decline did occur during the rally from 6/08 to 6/21. It has continued to deteriorate during the recent sell-off though and one has to wonder if that was some sort of a heads-up for a low of some degree.

7/02/10 – 2:00 – Just a quick thought with a picture that will save me something less than 1000 words. I have been viewing the low yield on 5/25 as a likely 3^rd wave low with the 4^th wave correction having ended on 6/03 (marked with an A on the accompanying chart). That count would have the current decline that began on the 21^st(shown as E on the chart), the third wave from 6/3 and that is why I think that the highs (low yields) are still several weeks off. We would still need to see a wave 4 and then a wave 5. But if instead, as the chart below suggests, the entire pattern from the low on 5/25 to the high on 6/21 is a triangle, labeled here as A, B, C, D and E, then the last impulse wave, wave 5 in this case, would have commenced at ‘E’ and it could have ended. The reason that I have not embraced this pattern is that it only works on the cash 10-year chart but still, I don’t want to totally dismiss it. Keep in mind that based on the wave theory, triangles are typical 4^th wave patterns and according to the book, the E-wave of a triangle usually overshoots or undershoots its’ objective, which in this case was the overhead trend-line, with the only requirement being that it does not exceed the extreme made by wave-C. I’ll get more into this notion next week but wanted to share the idea. Have a safe and happy 4^th of July.

8:15 – Someone once said that bull markets die hard and that can certainly be applied to the recent move in treasuries. Despite hitting great objectives overnight and then backing away before the opening yesterday, the treasuries regained their bid soon after they opened and rallied to still higher highs than what they had achieved overnight. The cash 10’s touched 2.883 while the 30’s hit 3.826, both well through what I had felt would hold in front of the jobs data. From those highs, they pulled back significantly and eventually closed about where they had opened (a doji) but still higher for the day. I had mentioned yesterday, as well as on several other occasions, that the bonds have a bad habit of making a significant move on the day before unemployment and once again that is the hand that was dealt. So be it. For the record, yields on the 10-year have dropped about 54 bps in the last month, nearly 30 in just the last week. That is a pretty amazing run heading into what are basically the most important numbers of the month and one has to wonder if the treasury markets aren’t trading off of something else altogether. The word ‘deflation’ has been bantered about lately and watching both stocks and yields nosedive the way that they have has to make you wonder. Even gold took another beating, trading below 1200 after having traded at 1263.70 on Monday. Oil also had a bad week as did the entire CRB index. I don’t know if that means the deflation bugs are on to something but they may very well be.

The SPX was down 20 points in the first hour but closed with only about a 3 point loss. The low tick on the SPX was at 1010.91, not far from that 1008 objective that I suggested was the minimum objective that I could come up with. That number was nothing more than a 38% retracement of the entire rally and that certainly makes it a level that many technicians are aware of so to see a bounce from it is not really a surprise. I personally like 950 better and still don’t see yesterdays low as anything more than temporary but with a market friendly number today, maybe the heat can come off for a while. Still, both the 1008 and the 950 area represent objectives based on the notion that stocks are correcting down and I’m not so sure that they aren’t impulsing into a new bear market leg. We’ll deal with that later.

At the end of the day, there seems to have been an exhaustion of the recent trends; up in bonds and down in stocks. Treasuries traded through some great objectives first though and patterns suggest that while we may have completed a component of the impulse that began back on 6/03, it is doubtful that the rally is over. If I can, I will post a brief update after the data is released but between the charts I posted yesterday and the ones that I am putting up now, you will be able to look at things the same way I will once the initial reaction to the numbers has been seen. What I do think is that there is still further to go in the bigger impulse wave but we may have seen the end of an internal 3rd wave of some degree. Until the 10’s trade through 3.16 and the 30’s through 4.09, it would seem doubtful that we have seen any sort of a terminal top.

I wanted to post charts of the 30-year today setup like those of the 10’s that I posted yesterday. For starters though, I thought I would update the 120 minute chart of the 10-year since the retracement objectives have changed based on the new low yields posted yesterday. Additionally, now that ‘wave-5 with a question mark’ may well have been completed. None of the longer-term objectives shown yesterday were achieved so I see no need to update the other charts. As you can see, there was another gap left yesterday morning that runs from 2.945 to 2.951 so that will represent the first meaningful resistance that must be dealt with. The next gap runs from 3.001 to 3.030 while the minor trend-line will have a value for the first 2 hours tomorrow of 2.996. The bigger retracement levels are now at 3.045, 3.096 and 3.146.

<chart>

This next chart if the weekly chart of the 30-year showing the remaining objectives for this rally. Yesterday’s burst wiped out my favorite near-term target of 3.90/3.88 so what you see on this chart are the remaining objectives although I don’t yet have one in mind that I like as much as I liked 3.88. Some of the objectives are obscured on this chart as they are plotted to the right of the margin but I will list them here so you don’t need to try and figure out what those on the chart say. First comes a minor Fib. extension number at 3.778 followed by what should be a much stronger area at 3.689 which represents the 50% correction of the entire bear market. The ones below there you should be able to see but truthfully, they should not come into play anytime soon.

<chart>

I’m not going to bother with a daily chart for the 30-year but below is a 120 minute chart and it should suffice for looking at the best ‘yield resistance’ targets if this morning’s numbers are market unfriendly. The first issue should be with the gap left yesterday from 3.898 to 3.908 and then comes the 38% retracement of the most recent run at 3.981. The trend-line has a value of 3.999 which is consistent with the gap from 6/29 at 3.993 to 4.013. The 50% correction is at 4.029 and the 62% at 4.075. The solid dark blue horizontal line represents the yield that must hold if the impulse is to continue while the dashed line is the ‘canary in the mineshaft’ warning. Finally, the Fibonacci retracement lines furthest to the right and dotted represent minor objectives if what I am calling a 3rd wave has not completed. Those levels are at 3.942, 3.978 and 4.014. I know there are a lot of numbers here but should there be a surprise in the data this morning, then once the initial reaction is over, look at where we’ve been verses the objectives shown here and you may be able to get a feel for what lies ahead. A reversal from one of the retracement targets should mean lower yields to follow.

<chart>

As mentioned above, until I see the 10’s trade through 3.16 and the 30’s through 4.09, I won’t be considering any counts other than the impulse wave count from 6/03 which should not complete for at least another week or 2, if not more. For any of you Elliott Wave Geeks out there, not unlike myself, I believe we are in an impulse from 6/03 and that impulse has completed waves 1 and 2 and then waves 1, 2 and possibly wave 3 of the 3rd wave at yesterday’s best levels. If correct, that means we need to see another new price high next week followed by a correction likely to last at least a week, and only then a final rally. Trades through 3.07 in the 10’s and 4.03 in the 30’s would be enough to back away from the long side for now, but not for long.

Have a great 4^th of July holiday.

7/01/10 – 8:15 – I’d planed to keep the commentary short today, partly because the markets didn’t really move yesterday and partly because I wanted to post several charts and explain how they are set up. An unchanged close in the 10-year after having matched Tuesday’s highs said to me we had yet to see any sort of a top based on my long-standing distrust of double tops in addition to the fact that I can only count 2 impulses up from the low on the 21st. Actually, never let it be said that nothing’s changed. The low of the day yesterday in the 10’s was 2 ticks into the gap left on Tuesday so while that gap narrowed, it also seemed clear that there were still not enough willing sellers to push the 10’s down the last 2 ticks needed to close it. While I don’t want to rule out much higher prices in this cycle – in fact they seem likely - until we get passed tomorrow morning, I am only concerned about finding the highs of the current push and I think they probably occurred last night. An overnight bid pushed the cash 10’s to a 2.90 while the 30’s traded at 3.87, both levels being 1 bp through what I felt were terminal targets for this push. True it happened overnight and true I hate using those trades for my analysis but the levels were great ones and the 10’s have already backed nearly half a point away from those extremes seen just before mid-night. The stocks had a quiet day for most of the day yesterday before the SPX saw about 16 points evaporate in the final hour of trading and they gave up another 10 last night which came consistent with the burst up in treasures but they are back to nearly unchanged suggesting there, too, the selling that has been so persistent of late may have dried up. The markets have a bad habit of reacting to Friday’s numbers on Thursday so while I won’t rule out further volatility today, I want to post some charts now to show how I would watch the markets on any further swings of significance today or tomorrow. The 3 charts below are of the 10-year and I will try to post a similar array of the 30’s before the opening tomorrow.

The first chart I am posting is a weekly chart of 10-year yields and I must once again remind all that the decimal is misplaced so the close shown in the right hand margin at 29.58 reflects a yield of 2.958. This chart goes back to the all-time yield trough from December of 2008 so that you can see the entire move up in rates and now this very impressive move back down. For now, ignore the trend-line and the blue, horizontal lines as this chart is all about the yield levels below current levels. Near the right margin you can see 3 lines that are blue and include percentages followed by yields. Those are the Fibonacci extensions using the move down in rates from the April crest to the May trough and then applied to the 6/03 corrective crest. Their values are 2.86, 2.51 and dare I point out, 2.16. Slightly to the left of those line are 2 other colored in light blue/green. Those are extension of the drop in rates from the June 2009 yield crest into the October 2009 trough and then applied to the April crest from this year. Their values are 2.75 and 2.544 and they are objectives of a larger degree. And finally, there are 2 horizontal lines drawn in Magenta that I derive using a little trick of my own along with some Fibonacci math, the values of which are 2.836 and 2.612. All of those levels are potential objectives for a wave ending yield trough and all can prove to be important. I look at that chart and see 2 ranges; the first from 2.75 to 2.86 and the second from 2.51 to 2.612. Any of the individual levels can work nearly to the tick but I’d focus on the ranges first and deal with the exact prices later. These are not the only resistance levels I see, as is obvious from the levels I post, but these numbers are not just resistance, they are potential targets for a top.

The next chart I’m posting is a daily chart that shows the decline in rates from the April yield crest. For starters, I’ve drawn a down-trend line in red from that April crest with a current value of about 3.23; probably not a factor this week. There is a smaller trend-line drawn in red as well. That line has a current value that lies in the gap that I have circled in light blue, both solid reasons to respect that area as support. I’ve drawn 2 horizontal lines in blue, one a solid line and the other a dashed line. The solid line is drawn below what I have labeled as ‘1 or A’. If it is an A-wave, then it isn’t significant but if the correct labeling is ‘wave-1’, that implies that we are impulsing down in yield and it becomes the level that a 4th wave correction cannot invade. In other words, a trade above 3.151 in the next several days means we are not – or no longer - impulsing up. In some respects, it eliminates the only wave count that would make me want to stay long, even if only for a while. The dashed line is the same type of line but drawn under a wave of a lesser degree. Let’s just call that one ‘the canary in the coal mine’. And as for the labeling, ignore it. For all intents and purposes, it doesn’t matter.

Finally, the last chart I want to post is a 120 minute chart of what has happened from the yield crest of 6/03. Here you can see the most recent drop in rates broken down further. I’ve labeled how I am counting the move and as you can see, I have yet to find what I think is a 5th wave (this chart doesn’t include overnight extremes) so it shows me no signs that the move is over. Once we start a correction, perhaps today, then as long as yields don’t rise above that horizontal blue line at 3.153, all is well but once that level is taken out, then long is probably wrong. If the market backed up right away today, then the Fibonacci retracements drawn on this chart in red at 3.087, 3.13 and 3.172 matter, but since we know we are no longer impulsing up if we trade through 3.151, we can eliminate the 62% retracement at 3.172. So what I will take from this chart is that on any up-tick in rates, the market may be a buy at 3.087 or 3.13, or else it is not a buy at all. If things unfold in an orderly way, then wave structure should help with all of the analysis but on a quick move and/or a reversal, don’t lose sight of this chart.

So to summarize; if the markets back up and I wanted to buy them, I would try to buy the 10’s against 3.08 or 3.13 - depending upon how good I felt - while stopping myself out at about 3.16. And if they continued to rally, on any trades through last night’s extremes, I wouldn’t be a seller of any significance until the 10’s pushed into that range from 2.86 down to 2.75. Last night’s highs now become a pivot of sorts as beyond there all bets for a near-term top may need to be shelved.

Tbondtrader

^_Tbondtrader