^_Tbondtrader

5/28/10 – 8:15 – When I looked at my yield charts after yesterday’s close I was reminded of a song that sports announcer Dandy Don Meredith used to sing on Monday Night Football games when they had gotten out of hand. It went “turn out the lights the party’s over, it seems that all good things must end”. Actually, I’m getting a little ahead of myself since the number that needs to hold for the impulse that began on the 13th to still have a chance to make a new high - the 5/14 high at 120-01 in the June 10’s – held and in fact the high yield in cash was right up against the 50% retracement of the move out of the 13th. And the equivalents in the 30-year held as well but the absence of even a bounce at the gaps left from the 20th is a bad sign as is the 1-day island reversal left at the highs. And now, the amount of time since the highs were printed is getting too long for me to believe this is still a 4th wave from the 13th, based on the duration of the second wave. So even if the short-term wave theory leaves the door slightly ajar, I’m in the ‘prove it to me’ mode from the standpoint of seeing any further new highs. And when you look at how well the market adhered to the wave theory as far as structure goes and how close we came to major objectives that were in play in some respects since even before we got to 4.01 in early April, that bigger pattern that says that we may not see the 3% area again, must be respected. Show me a 5-wave rally and a 3-wave pullback and I’ll show you a reason to be a buyer but absent that, I have to think we may have seen an important turn. There is that timing for a trend-change next month but if you recall from an update a few weeks back, the only time since 2003 that an extreme yield for the year was not made in June, was in 2004 when the high yield for the year came on May 14th, and the test of it occurred on June 14th, right smack in the middle of the timing window. Could we be in store for a repeat performance this year? Whenever this first impulse - if that is what this is - completes, then a corrective rally should commence. The high of this current rally occurred on the 25th of May so maybe we should be thinking about the 25th of June for a wave-2 high. Whatever the case, the market has given up a lot of ground very quickly from a great objective and given that there is a potentially extremely bearish count that would suggest we may never see these yields again, it makes sense to pay close attention in here. And I would be remiss if I didn’t also say that there is another count that would allow for a corrective pullback and then a secondary rally to somewhere in the 2% handle. The first test for me will come when I see the wave structure of the move that follows this current break but the real test will come after a secondary sell-off that should develop in almost any scenario. If the break from the highs of earlier this week develops into a 3-wave structure, then I’ll be screaming to by the pull-back, likely to be somewhere in the vicinity of 3.50 but if a 5-wave decline is what we get, then the worst case scenario will be in play.

 Stocks aren’t much different than bonds. The rally out of the low so far has been nothing short of spectacular and it came from a new low below that of the 6th which the wave work said was necessary. Now it is all about how we rally. I am not sure if the entire decline was a 3 or a 5 but the structure of the rally is how I will decide. For now, I suspect that both the stocks and the bonds have further to go in their newest trends but once these initial moves complete and the retracements commence, I hope to be able make much larger degree decisions about where both are headed. Right now, I would think that the extremes from the 13th are not a bad guess and from somewhere near there, we could see reversals that should tell me volumes about the ultimate direction of both markets.  

 Today the September contracts replace the June as the most active and I will be using them for my analysis and support and resistance numbers. This is the reason that I rely heavily on cash charts for the longer-term analysis as that way, the numbers never change. The price in the September 10-year that equates to the 120-01 uncle point in the June, is 118-31. Below there and we should at least see the lows from the 13th tested, which on the September contract were at 117-13 but that’s not likely to be the end. Be advised that there is good support at 118-17+ and again at 117-19 but for me, the issue here is are we ultimately headed all the way back to, and even through, the early April lows that equate to 4%.

5/27/10 – 8:15 – The stocks have rocketed up overnight and of course with that, the treasuries have come under pressure. The 10’s have been down about half a point and the 30’s nearly a point with the S&P futures up about 25. Yesterday morning the 10’s gapped under the same price that they had gapped over on Tuesday leaving a 1-day island reversal. I don’t think the wave theory could have been much more helpful during the past several weeks but if anything worked as well as the wave theory, it was gap analysis. They’ve continued to impact trades without any apparent reason and as important as gaps are, island reversals can be even more meaningful. And if you still aren’t convinced that gaps work, then one more bit of supporting evidence came yesterday when the high yield on the 30-year was at 4.158 while a gap left from the opening on the 20th began at 4.153 and that early yield crest held all day long. We came out of yesterday with a gap below (above for the yield charts) left from the 20th, and a gap and even an island above, left from the opening yesterday. If the highs are not in, then I would expect the gaps below to provide support and if they don’t and we start to lose more ground, that island above can loom large. The overnight low was actually 2 ticks below the bottom of that lower gap in the 10’s and for now, they are back above it. The test comes in half an hour when the markets open for their day session. One thing any bull should not want to see is a second island left by a gap below 121-21. As far as wave structure goes, viewing a very short-term chart makes it difficult to count the initial part of the decline from the highs as impulsive, however, if you factor out the noise by lengthening the bars, you could arrive at a different conclusion, especially with yesterday’s gap in what would have to be considered a 3rd wave down. As far as the pattern from the lows of the 13th, we now have all of the necessary structure to call the rally an impulse with 5 waves but it is also still possible to label yesterday’s high a B-wave, with one more rally to follow. That count becomes much less likely if that second gap doesn’t hold and is invalidated completely with a trade below 120-01.  The chart below shows the potential 5-wave decline in the 10’s labeled as well as the island reversal which is circled. I’ve also included the Fibonacci retracements of the entire move out of the 13th and what interests me there is the fact that the 38% retracement target held perfectly yesterday and is consistent with the beginning of the gap from the 20th. Much beyond the 50% correction at 120-10+ and the rally may very well have run its’ course.  

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Stocks have been hit so hard of late that it was scary to try and pick a bottom but all I needed to see was that new low below the ‘flash crash’ low to satisfy my preferred wave counts and by yesterday, the rally could be interpreted as an impulse. With the reversal on Tuesday, the evidence for a low being in place was building and with the large upside gaps that should be produced this morning, it is stronger still. The volatility is building as well and that, too, can be a sign of a trend change and all of the uncertainty that accompanies one. At 3:20 yesterday afternoon the S&P futures were at 1080 which was up about 7 points for the day and 20 minutes later they hit 1063. Two hours later it was 1055 and by 8:30 last night they were back up at 1066. Right now the number is 1085. If the volatility isn’t suggesting a change of trend is at hand, then it may well prove to be the reason one isn’t as it may begin to scare off investors but for now it is more likely to scare off the bears. Looking at the list of ‘usual suspects’ in the form of traditional indicators, I see what I usually see from them - which is nothing very concrete. Volume is the most interesting to me and potentially the most friendly since it was lower on Tuesday when the lows of the move were posted, than it was back on the 5th, the day of the crash low. In fact, it was even lower than it was on Friday, the last up day in stocks before this bottom. Stochastics, as usual, are inconclusive with the dailies being near oversold but not quite and with no bullish divergence while the weeklies are still pointed down and not yet oversold. I guess that has to be considered a negative. MACD, an indicator I watch even less than the stochastics, appears to me to still be negative as well since they are pointed down on both daily and weekly charts. I could go on and on but here is the bottom line; the new low made 2 days ago in stocks potentially satisfied an impulsive count from the recovery high on the 13th which may have ended either a 3 or 5-wave decline off the top. Either way, a reasonably strong rally can develop but to be sure, the market is fragile. The late break yesterday didn’t do too much damage to the charts but today could prove interesting. Below is an hourly chart of the SPX with the 5-wave count labeled as well as the Fibonacci retracement targets. Any new highs posted above those made yesterday will give the rally the appearance of a 5 and that means quite a bit more upside is likely to follow. Things seem to be reaching critical mass.

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Once the gap fill area at 120-21 is taken out, the 10’s are likely to be in trouble. I would expect them to make a stand at 120-10+ but that should only produce a bounce and a selling opportunity, possibly a second wave from the highs. If that does happen, then the next leg down would likely erase the entire rally from the 13th that began at 118-15+. That is the bigger 4th wave low and the general area that must hold if the entire rally that began in April when the 10’s were at 4%, is not to be completely erased. I’ll address that more fully in the days ahead.

5/26/10 – 8:15 – These are interesting times to be in the markets for sure. The real fireworks occurred Monday night but there was no shortage of excitement yesterday. After the S&P futures dropped more than 35 points in night session sending the 10-year up nearly a point and a half, both eased away from those extremes but still gapped open yesterday morning. They both spent the rest of the day erasing much of what had happened the night before and while the 10’s still closed half a point higher making it impossible to call it a reversal, the stocks were a different story. Following their downside gaps, they began recovering almost immediately and their recovery was complete. While the Dow still closed lower, it was just 23 points lower after being down as much as 260 while the SPX actually closed marginally higher on the day. The overnight low yield in the 10’s was at 3.06 so with my secondary target area of 3.051/046, that number is more than a little interesting but then again, it was an overnight trade and I never know how to deal with overnight trades. As I had mentioned in yesterday’s report, the overnight low in the S&P futures was right on support from the February low but not happening during the day session, the trade is difficult for me to embrace. I had said most recently in yesterday’s update that ‘I still suspect that we are near an extreme in both stocks and bonds, at least for this cycle’ and now for obvious reasons, I still feel that way – in fact even more so.

One problem I’m having with counting the waves following yesterday is that if you use the day session only, which I do for my wave analysis, then the truth is that the treasuries never really made any significant new highs. The 10-year futures made a new high by a tick and a half while the 30’s exceeded their previous high by 3 ticks. In cash, the 10’s made a new low yield by less than half a bp while the 30’s failed to get back to their low from the 5th by a full bp. So what does that tell me? It tells me that this could prove to have just been a B-wave since we basically just doubled topped. Sure the overnight extreme was clearly in new high ground but you have to make your rules and stick to them and my rule is to read waves on day session charts only. The one thing that makes me want to call yesterday’s move an impulse is a fact that I brought up in yesterday’s report. The second correction that began on Friday, which I am calling a 4th wave, lasted almost exactly as long as the previous correction which I had labeled the 2nd wave and that fits well with the wave theory. At the end of the day, however, there is no right or wrong way to look at what happened, we just have to deal with it. I thought a reversal was at hand and I still think it. And now we have what I can call a potentially completed impulse from the 13th, if we can just continue to back away. The true reversal in stocks is enough to make me think both markets may have seen their extremes, at least for the time being. As far as the structure of what happened yesterday goes, the rally in stocks can be impulsive though the jury is still out but in all honesty, there is nothing impulsive looking about how the bonds sold off so I just don’t have much that is telling me that rally is over. Downside gaps in treasuries this morning will help but I do want to see follow-through.

Another thing that I think is worth mentioning and which seems to point to a trend-chance occurring here in treasuries comes from volume analysis. Three of the past 4 days and 5 of the past 14 going back to the day of the crash low, have produced more volume than any other day in more than 2 years. When viewed on a weekly chart, the volume last week in the 10’s was the highest since November of 2007. Something definitely seems to be brewing.

5/25/10 – 8:15 – Very quiet inside days in stocks, bonds and even the dollar yesterday. Gold was the only market mentioned in yesterday’s update that traded outside of Friday’s range. The decline in the 10’s from 3.10 looked like a 3 on Friday and it looked like one when they closed yesterday. The simple fact that the treasuries opened near their highs yesterday and then closed near their lows looked a little negative but a sell-off in the last hour of stock trading, following the bond close, costs the S&P’s 12 points and then came the night session. The stocks continued to nose dive last night as 10’s were up half a point with the S&P futures down another 15 and threatening the lows of the move and that was even before the Celtics game was over. By early this morning the S&P’s were off more than 30 and the 10’s up over a point. It’s safe to say that the short-term wave pattern was more meaningful than was that 3.10 yield trough seen on Friday.

As good as the objective was that was hit on Friday, the wave pattern out of the low on the 13th appeared to be incomplete and in need of one more rally. From the extreme on Friday, it appeared to me that the treasuries were in a 4th wave correction and one thing I had to work with was the fact that what I was calling the second wave lasted 11 market hours. While the 4th wave didn’t need to be equal to the 2nd, it should have been similar and at the 3:00 close yesterday, the correction was in its’ 12th market hour since the 3.10 trade. The timing was as perfect as was that 3.10 print and – well – here we are. The 10’s are set to open through 3.10 with the stocks in what can only be described as a near freefall. I still suspect that we are near an extreme in both, at least for this cycle, but stocks remain a real concern as they are so much more emotionally driven. I want to pay close attention to those next objectives in the 10-year at 3.051/046 and 3.026/025 as well as at 3.903 and 3.888/887 in the 30’s. Those levels rate almost as high as did the 3.10 for rally ending targets. At the same time, the S&P futures touched 1036 overnight equaling the lows achieved back in February and they have bounced about 10 points since. The equivalent low in the cash SPX is at 1044.50 below which support should come in at 1029 and again at 1019 before the first good Fibonacci objective will come into play near 1006. That first Fibonacci objective in the Dow is near 9428 so the fact is that the stocks can still be in for a rocky ride and being short bonds will not be a very good idea until stocks find some support. From these new extremes in both markets, however, should 5-wave counter-trend moves develop, the first signs that we may be in for significant reversals will be upon us.
 

5/24/10 – 8:15 – The 10’s are up this morning and just like most of the mornings recently when they’ve opened strong, it seems to be based on a weak stock market. Sounds like business as usual but is it really after what we witnessed on Friday? I mean, how much better could it get than having the 10-year run like a scalded dog, straight to a perfect objective and then stop on a dime? Well, it could get a lot better. It could do that with what appeared to be a completed impulse wave from the last swing low on the 13th. Or it could at least have left a clear reversal on the charts. It did neither and I’m left with a problem. The 3.10 was my favored target for the entire rally and it held to perfection but the rally out of the 13th still appears to need one more rally to a new high before it can be considered to be complete. Which do I trust, price or pattern? The answer seems to me to be pattern and for several reasons. For starters, it is the wave work that said the 10’s should make it to these levels so I don’t see abandoning it now. The decline off the high in the 10-year appears to be a 3-wave move although admittedly the 30’s have a different look due to the fact that they crested earlier in the morning, giving them a potential 5-wave decline. Aside from the wave patterns however, the treasuries didn’t exactly fail or even reverse. They did fill the opening gaps making those appear to be exhaustion gaps but at the close of business, the 10’s still closed up nearly 3/8ths of a point with the 30’s gaining nearly 7/8ths. The cash 10’s had their best weekly close since 10/07. The conclusion I keep reaching is that the bulk of the evidence still points us higher. The other thing that I believe to be important is that 3.10 is such obvious resistance it’s no surprise that the 10’s stopped when they got there. It happens to be the lowest yield the 10’s have seen since almost exactly 1-year ago, on 5/18 of 2009. You don’t have to be doing wave work to see that as resistance and it just adds to the pool of traders who might use that level to sell against. Just keep in mind that the 10’s can’t get through 3.10 without first getting to 3.10. I think the right course of action is to look for some sort of a clue that says we’re done and absent that, assume that we aren’t. For me, the first one will be either the development of a 5-wave decline, or trading below what I am calling the wave-1 high from the 13th, which I think is at 120-01. If you’ve been long and looking – or hoping – for 3.10, then you should probably take some money off the table but if you are approaching today like Friday’s 3.10 never happened, then for now it looks like we need at least one more new high to complete the impulse from the 13th, an impulse that could complete the bigger impulse from the April low.

 Even though wave theory seemed to know that the 10’s were headed to 3.10 for quite some time now, clearly it was the stock market that got them there. So did the stocks do anything unusual on Friday that might help with the bond analysis? Well the SPX only took out the ‘flash crash’ lows but a funny thing happened when they did, they reversed closed 16 points higher for the day. The Dow never quite took out their low from the 6th before rallying to close up 130. I have often admitted that I haven’t been convinced on a wave count for stocks and haven’t decided whether I thought they were impulsing down from their high on the 13th, or whether they might be coming down in a B-wave leaving open the door for another strong rally back to those highs. I’m still not convinced. If it’s a B-wave and stocks are about to rally, then it should be from those lows so we’ll find pretty soon. I think it could go either way but I also think that if stocks go down, then the bonds probably keep going up.

 The Dollar Index sold off on Friday and finished with a potential ‘key reversal’ on a weekly chart. It did that with persistent overbought oscillators that have bearish divergences. At the same time, Gold traded $80 off the record highs it established just the previous Friday. By one day, it avoided the same ‘key reversal’ look that the Dollar has. That record high broke the previous record made back in early December and that high was made on better volume both on daily and on weekly charts. I bring up these other markets because this I am looking for an important trend-change in fixed income and there is some logic to the notion that if there was to be a major trend-change in one market, then the probabilities might be higher if related markets reversed as well. We seem to be at a point where the Dollar, Gold, Stocks and Bonds may all have reversed or could be reversing, but it’s probably just too soon to know.   

 For today, I will be watching all of the above mentioned markets but none closer than the bonds and the stocks. In the 10’s, not finding support at the next gap at 120-21/22 which is just 1 tick below the 50% retracement of the push up from the 18, might be the best early warning signal that something is amiss but until they trade below 120-01, they can still recover. And should we make any new highs, there are great objectives in the 10’s at 3.051/046 and again at 3.026/025 while the 30’s have 2 great levels at 3.903 and 3.888/887. In stocks, the SPX does not appear to have rallied in a 5-wave move which needs to happen if we bottomed in a B-wave. A trade above 1104 would be my first indication that stocks can be headed higher but I would prefer to see a new low followed by a rally that looked like a 5-wave move. Interestingly enough, that new low, were it to occur, would likely give us another new high in bonds and that could complete the impulse up. And the early indications are that I might just get those new extremes that I am looking for.  

 I’m including 2 charts today, a weekly chart of the Dollar Index and a weekly chart of Gold. The Dollar Index shows both the ‘key reversal’ as well as a stochastic oscillator, which is overbought and with bearish divergences, that I mentioned above. The Gold chart, having missed by a day of having that weekly reversal, shows the bearish divergence in volume from the December high.

5/21/10 – 10:15 – Less than 2 hours in and we’ve seen significant reversals in everything. The S&P futures are 20 points off of their lows and of course with that, the treasuries are backing off rather dramatically. The real feature for me of course is that the low yield in the 10-year is at 3.104 and the last is at 3.18. The opening gaps have been filled and the question in my mind is whether to honor the short-term patterns which suggest we are in a small degree 4th wave with one more up-trust to follow to complete the impulse from the 13th, or whether I should honor the fact that we have hit and failed from my long-standing favored objective for the entire move, at 3.10. The wave work not only says that we should still see another high next week, but it doesn’t rule out that from a new high, we cannot correct and start another impulse up. Picking a top using wave analysis is like picking a top with anything else; it is highly risky. I’d clear out of this market for now and wait for some new indication that there will be a further rally rather than risk a top at such a good level. The presumed 4th wave correction that could be developing should not last beyond Monday and if I could find a good enough reason to get back in based on pattern, I would but absent a good entry with a good stop, I’d be inclined to stand back for a while. For now, best objectives for this pullback if it proves to be a 4th wave, are from about 121 all the way down to near 120-12. I should be able to narrow down that range by Monday morning and as long as the 10’s hold above 120-01 and the wave structure doesn’t tell me otherwise, I will still look for new highs next week. As far as looking to trade from the short side, I will await an impulse down and a corrective rally before I’ll stick my neck out.

5/21/10 – 8:15 – Only the cash long bond failed to make new highs yesterday as the stocks got clobbered once again. Making new highs on 3 of the 4 charts I monitor would seem to have made the case for a continued rally in treasuries something close to a slam dunk but the fact that everything faded into the close set up potential island reversals had they gaped back down over the same area that they gapped above yesterday. Obviously much if not all of the recent strength in treasuries came as a result of the faltering stock market which took another real beating yesterday and came fairly close to the lows seen back on the 6th. Following some panic selling mid-day, the SPX managed a 20 point intra-day rally before collapsing and making new lows into the close. That late break took place after the bond market had closed and more selling overnight has helped to push the treasuries back up to the highs pre-opening, eliminating any chance for an island reversal - at least for today. Now it seems likely that we are well on the way towards a significant high but one that could now come earlier than the mid-June timing I have often mentioned. It appears that we have seen the 1st, 2nd and at least part of the 3rd wave of the final rally and I just don’t see how it could last much beyond next week. While the timing for the high may have been pushed up, not much else has changed for treasuries as far as I can tell but that statement may not be true for stocks. 

The SPX has now given back well over 90% of the rally out of the ‘flash crash’ lows and I just see no way that those lows don’t get taken out in spades although I don’t yet know if that happens now or later. The decline from the high on the 13th could still prove to be just be a large B-wave, opening the door for another strong rally but one way or the other, I suspect that the stocks still have a long way to go. From any new low, it will look as though they have come off the highs in a 5-wave move and that would suggest that this is only the beginning of the decline, not the whole thing. 

The 3.10 yield trough in the 10’s from October has always been my favored target for this rally but there are several others to be mindful of; most notably in the 10’s are 3.145, 3.046, 3.026 and an extreme at 2.86. Not to worry though as there is every reason to believe I can eliminate some of them as the 5th wave that now appears to have begun on the 13th continues to develop. And then of course there is the 30-year to deal with but for now, I just want to watch what appears to be an impulse in the making and once I find the end of the 3rd wave from the 13th, where we appear to be now, I should be able to zero in on the very best target. 

For now, with the 10’s poised to gap up again, there is no reason to think they don’t still have further to go. They do, however, appear to be in a small degree 3rd wave and that means that somewhere in here, they will pause and build a 4th wave correction prior to what will potentially be a final burst up to complete this impulse. If they do gap up and then close lower on the day, that 4th wave could be starting so some caution is in order up here but I still don’t see the most recent rally that began on the on the 13th as completing prior to one more correction that should last several days. That means the ultimate highs should not come before next week at the earliest. On a gap to the upside, a trade back below 121-07 would be very suspicious. 

5/20/10 – 8:15 – A rally early yesterday put in new highs from the low on the 13th on all of the charts that I watch but so far, with none of the markets making it back to their highs. They faded late yesterday but have captured a bid once again this morning on the back of a weakening stock market. Now trades back below 120-01 in the 10’s and 122-18 in the 30’s would confirm the rally as a 3-waver and to me that would mean a B-wave. Should we not make it back to the highs first, that would mean a probable triangle in the making. Watching this unfold on an intra-day chart makes it seem like it’s taking an eternity but in reality, the duration of the correction so far is in line with expectations. Back on the 7th, the day after the 3.266 trade in the 10’s, I had said in the update that ‘we had probably finished a 3rd wave and that I would expect to see a 4th wave correction which should last several weeks’. Today marks the 10th trading day out of that extreme and everything seems to be pointing to next week for the correction to end – assuming that the stocks don’t put an end to that notion with hard break today – so everything fits pretty well. And if  we do complete a correction and break to the upside in price, then mid-June looks like a good time frame for the end of the move. The timing for a trend change in June is fairly compelling. I have attached a chart of the 10’s showing the turns but in plain English, here they are. Starting with 6/16/2003 when the 10’s made their yield trough for the year, what followed was a yield crest for 2004 on 5/14 but a test of that yield crest on 6/14, then the low yield for 2005 came on 6/03, the high yield for 2006 was on 6/26, the high yield for 2007 was on 6/13, the high yield for 2008 came on 6/13 and the high yield for 2009 on 6/11. Timing patterns don’t work forever but at the same time, is it really worth fighting such a pattern as that, especially if other analysis seems to be pointing to a 5th wave move coming? I think not and should we complete a correction and begin to impulse up, I hope to be able to zero in on a best guess date for the turn. As you can see, since 2003 major turns have come between the 3rd and the 26th of June but on 6 of the 8 years shown, the turns came between the 11th and the 16th - and this year, the 12th and 13th fall on the weekend leaving a 4-day window as ‘prime time’. 

Stocks closed lower but they did make a comeback in the afternoon contributing to the then weakening bond market. The SPX traded below its’ 62% target while the Dow held above its’ but they are under pressure once again this morning. To me, the wave patterns are no clearer today than they have been for the past several weeks but I still see no signs of a bottom. If you were to ‘eliminate’ those 15 or so minutes back on the 6th when the markets collapsed and then recovered for reasons that are still not entirely clear, then yesterday’s lows would have represented more than a 90% retracement in the SPX and just under 88% in the Dow. Retracements that deep rarely hold but then again, we can’t ‘eliminate’ those lows so it really is academic and early this morning, pre-opening, those lows from the 7th have been exceeded in the S&P futures. If you are a fan of oscillators, you have to go to a 60-minute chart to find a stochastic that is oversold as both the daily and the weekly are mid-range and pointed lower. The monthly is overbought but just turning down from levels not seen since the summer of 2007, prior to the all-time top. A historically very profitable trading system that I watch based on the TRIN indicator, one that measures the internal strength of the markets using advancing and declining issues and volume, is in a sell mode as well. I can’t help but feel like more trouble lies ahead for stocks and with the break yesterday and again this morning, the less bearish potential wave counts are dropping like flies.

 Gold traded yesterday $65 off the record highs of a week ago and it is under pressure again this morning while the Dollar Index continues to push to new highs. In the Dollar, however, there are divergences building on several oscillators, both daily and weekly, that do imply a break of some degree is coming.

 At yesterday’s best levels, the 10’s had recovered about 86% of the decline off of the highs on the 6th but those highs are being threatened this morning. If this early strength today doesn’t carry them to new highs above those of the 6th – and once again I would urge paying attention to all of the highs still highlighted in red on the support/resistance below – then a C-wave decline should develop with targets beginning at the 119-03/10 gap and extending into the mid to upper 118’s. The first decline from the 6th took 5 days while the rally back took has taken just 4 so far. In a contracting pattern (triangle), that is pretty normal and that is why I suspect that if things continue to go the way they have been going, we can expect to see the correction end next week – but today may test that idea. A failure from short of the highs suggests that the choppy nature of the trade will continue but should we actually make it back to the highs before we break, then things would be different since from there, I would expect to see a 5-wave move down with all of the characteristics of an impulsive move - except that it should stop near the lows of the 13th. For now, though, the question seems to be whether or not the highs will hold and stocks seem to be the key.

 Below is the chart mentioned in paragraph one above, showing the turns that have occurred in June since 2003. As I always will point out when I post my cash charts, the numbers on the right side of the chart represent yields but the decimal should be moved one spot to the left so 50.00 = 5.000%. The timing is compelling and whether things go as expected and we pull back one more time, or break out now, June still figures to be a prime candidate for a top of some degree – perhaps major.

5/19/10 – 8:15 – At 8:30 we get CPI and that can obviously have an impact on the patterns so if the move is too violent, much of this may become academic. Yesterday produced a heavy stock market and a strong treasury market but with no real change in pattern or opinion. The best guess for now is that Thursday’s low was the end of a large A-wave and we are still in the B-wave and probably in the later stages of it. If you were to view the B-wave as a minor ‘abc’, then we are likely in the c-wave. We should get at least a little further push to the upside to complete this larger B-wave rally and that push should either fail near 120-16 if the correction is to be a triangle, otherwise very near the previous highs if it is a ‘flat’. Personally, I have favored the notion of a triangle only because following the violent burst into the 3.26 yield print 2 weeks ago it just seemed like a narrowing pattern was a more logical way for the correction to play out – as if logic matters. And following Monday’s action, it appeared that we might have seen the crest of a B-wave within a triangle but the number that needed to hold - 119-03 - did and that tells me that both the triangle and the flat scenario are still in play.  Using wave equality targets, the treasuries now seem to be pointed back to very near the highs and that means a probable ‘flat correction’ – assuming we don’t just go sailing through them. Actually, wave equality targets for this next high based on the rally out of Thursday and the sideways move of the past 2-3 days, come in just below the current highs in the 10-year cash as well as both cash and futures for the 30’s. The intriguing chart, however, is the one that I trust the most for my wave analysis, the 10-year futures, which has for its’ wave equality target 121-01+ - the exact high from the 6^th. That may prove to be just a coincidence but it’s enough to have me favoring a true test of the highs. Should we trade up to those previous highs today then only a trade back below 120-07 would confirm it as a B-wave high. I still believe that the least likely outcome for this current rally is that is breaks through the existing highs right now and that is based on the initial movement out of those highs but I do think that trade is coming ‘sooner or later’ and every day gets us closer to ‘later’.

 I almost get tired of mentioning how important I think that gaps are but I never get tired of watching them work. Realize that the gaps that I mention are the ones that occur from the 3:00 p.m close to the 8:20 a.m. opening. Yesterday the 10-year futures traded into the gap they had left on Friday morning but didn’t come close to filling it before reversing back up. The cash 10’s and 30’s came very close to their gaps but never managed to even enter them. It surely seems that when pattern is telling us to look for a reversal and there is a gap nearby, you can consider it to be the prime suspect for the turning point. With the advent of 24 hour trading, I couldn’t begin to tell you why they work as well as they do, but they certainly do.   

 Once again the strength in treasuries came consistent with weakness in equities which opened higher and spent the entire day in a down-trend, the SPX eventually trading more than 40 points off the highs and not closing much better than that. That chart is looking more and more like the ‘flash crash’ low of 5/05, regardless of what caused it, will not hold. The 2 stocks which interest me the most right now and that I believe can have serious implications going forward – Goldman Sachs and British Petroleum – both made new lows of the move yesterday. I don’t have a good opinion of what the preferred wave count is for stocks – several are still in play - but I just don’t at all care for the look of the daily charts. The Dollar Index continues to make new highs, now having reached the best levels it has seen since March of 2009, while Gold has now softened about $40 from the record highs it hit 4 days ago.

 As for today, presuming that the numbers don’t send the 10’s up or down more than a point, there will be little new to be said about patterns. Should we make a clean break of the highs at any time, you know what I’m thinking and that is that a test of 3.10 in the 10-year is a good bet. On an extremely hard break to the downside, while my near-term outlook could surely be impacted, I would need to see the 10’s trade through 3.80 to force me to abandon my bullish count although I suspect I would know long before we got there that something was amiss.  From a risk/reward point of view, a trade below 119-22 would at least suggest that another test of the gap below at 119-03/10 could be in the works, while I would pay very close attention to all of the markets with regards to their 5/05 extremes should we get a very bullish reaction to either the numbers or to a continued weakening stock market. If you look below at the support and resistance levels, I have highlighted all of the resistance areas which include the extremes seen 2 weeks ago, in red. Absent a blowout one way or the other, it’s business as usual with the end of this correction not likely to be seen for at least several more days.

5/18/10 – 8:15 – Now that’s the kind of action I was looking for. With the new highs of the current push made yesterday followed by a solid reversal, I no longer see the potential 5-wave rally that had begun to disturb me over the weekend. It isn’t that there is no chance of an impulse developing now but it isn’t nearly as compelling and now the rally of the past several days fits nicely into the picture that had been painted during the preceding sell-off. Of the 4 markets I most focus on, only the 30-year futures did not exceed Friday’s highs yesterday and with that, I suspect that this rally will prove to be the B-wave that I always felt it was. Furthermore, if this correction is going to become a triangle – one of the early preferred counts – then we may have seen the end of the B-wave yesterday. It would have been a little short of where I would have expected it end, especially in the 30’s, but it would still work quite well in the 10’s. The next day or so should tell the tale and it is doubtful that the entire correction would end that soon so I remain in a ‘wait and see’ mode. The first strong indication that the B-wave has ended will come with a trade below 119-08 while trades as low as 118-12 would still fit within a triangle pattern. The fact is that wave theory allows for so much noise within an A-wave and a B-wave of either a ‘flat’ or a ‘triangle’ that we a real resolution may not come as quickly as we might like. And we still have to get past a potentially important number this morning at 8:30 when PPI is reported. For now, things are progressing about like they should and we’ll just have to wait out what had always figured to be a choppy, range-bound trade for several weeks. Maybe the most important thing for me is that so far, nothing has occurred that would give me cause to abandon my bullish outlook for the next several weeks.

 The low yesterday in the S&P futures was 1112.75 while the 50% retracement of the near 120 point rally out of the ‘flash crash’ low was at 1114 so that’s a near direct hit. The cash traded about 5 points through its’ equivalent. I suspect that low will now take on some added importance and scare more than a few bulls should it be taken out. Goldman Sachs, which pretty much was the catalyst for the initial break in the indices, made new lows of the move yesterday before recovering late and that is a pretty bearish development even though that stocks did not get hit very hard 2 Thursday’s ago when the rest of the world nearly came apart. Still, that can’t be taken as a good sign. I’ve said several times in the past several weeks that I don’t feel comfortable with any wave count from the top but I am impressed with the look and placement of the top and thus, I still feel like a defensive posture is still in order - at least until I get a better handle on the wave patterns.  

 So here’s my caveat for the day. If one thing bothers more than any other with regards to my preferred wave count, it is that things have gone so well for the past several weeks that I worry. No matter how hard one tries, correctly forecasting the markets will always prove difficult and the more you try to call every small swing, the less likely you are to be successful. I don’t mean for that to sound like an excuse before I need one, but rather it is times like these, when you feel very comfortable that you know what a market is doing, that you can get burned. You don’t want to let a false sense of security built on a good call be the reason you don’t use and honor a stop since all that wave theory, or any other similar analysis can do, is to tell you what is likely to happen within a certain pattern and patterns, like records, are made to be broken. So keep that in mind as we move forward in what I still believe to be fairly clear pattern that should lead to new highs in the next several weeks.

5/17/10 – 8:15 – Upside gaps in treasuries Friday morning came as a result of soft overnight equity markets and when the stocks kept going down, the treasuries kept going up. At the best levels of the day, the 10’s had retraced just over 60% of the decline from last Thursday and were up more than 1 ½ points from their lows and that was just the first day out of those lows. The 30’s ran close to 3 points. Such a large move in just a few market hours and with an upside gap was enough to make me take another look at the charts but having done so, they still looked to me like the highs should be safe this time up - should being the operative word in the sentence. Then I looked at the screens last night and saw that the 10’s were up another half a point plus as the S&P futures were down another 15 and I was worried that this rally was just not going to stop regardless of the pattern of that first big sell-off that bottomed on Thursday. If this rally is truly a B-wave then it needs to start looking like one which means a choppy, 3-wave affair with only a mild upside bias. I just wasn’t ready for another upside gap and it appears my worries were ill-founded. By this morning things had settled down as now the treasuries are down and the stocks are up. This is more like it.  

 The patterns aren’t perfectly clear - they rarely are – but if I were to rate what I thought were the best potential wave counts, #1 would have this rally as a B-wave with a much stronger rally still a week or so away while #2 would be that we just continue up right now - and therein lies the problem in expecting one more pull-back. The 2 best counts seem to be that we rally now or we rally later. For now, any bearish count seems to take a back seat to either of those and I would hate to get caught short expecting ‘just 1 more pullback’ before a strong rally. Except for a brief few minutes just after the opening on Friday when the 10’s touched 119-13, there would have been an island reversal left below us and that would have been a very powerful picture so while the entire decline looks to be just an A-wave of either a flat or a triangle - and we should know which very soon – it seems that there is a growing risk to being short near the highs.

 I often report on stochastics even though I don’t care much for them but for what it’s worth, the daily stochs are just over mid-range and with the hard up day on Friday, they are clearly pointed up. I’m not sure how those who rely on such indicators will read that. They have come down from overbought but have not made it anywhere near oversold so from that perspective, they might be read as supportive of the idea that we have more correcting to do. The weeklies paint a different picture as they are continuing to rise and have crossed above the traditional 80% overbought level. I repeat this over and over but will again; in a strong market, the stochastics can remain overbought for a long time. Just because the weekly stochs are above 80, there is no reason to become bearish. Rather, with no indication they are about to fail, I think that they support the idea of another rally to new highs just like my interpretation of the wave theory suggests. I’ll view them as very much in line with the notion that 3.26 will prove to be just a temporary stall point. Volume analysis is no different. The past 3 weeks have produced very high weekly volume and all three weeks have produced higher closes. The dailies are not convincing one way or the other. Open interest has been increasing for this entire rally although it was also increasing prior to the rally. It does, however, appear to have leveled off but considering that we are just a few weeks away from a switch to the September contract, that could be the reason. I’ll take a closer look at both contracts before mentioning it again. I could go into RSI and MACD and who knows what else but everything seems to be telling me the same thing – treasuries are still likely to be going up.  

 The lows in treasuries touched on Thursday were clearly at great levels. The real thing to be taken from how they rallied out of those lows may be that there were buyers ready to step up at even the highest of the supports from both gaps and trend-lines and the first ones that were tested, produced a very strong rally. Clearly it was the soft stock market that attracted the buyers but as far as the 10’s had run last week, the downside could have been much worse. Lest we forget, even with that incredible spike 2 weeks ago when the stocks got crushed sending the treasuries on a rocket ride, both the 10’s and the 30’s closed higher still last week. The record drop in stocks following the beautiful topping price and pattern suggests to me that something larger may be brewing. A glance at a chart of the VXV – the CBOE index for the S&P 500 3-month volatility – reflects a serious change in sentiment. In the early stages of the economic meltdown in November of 2008, that index traded just under 70. On April 21^st it touched 18.72 and now it is back over 30. Never mind that it traded at 37.14 during the ‘crash’ the week before last, even without that part of the spike it is suggesting that the stocks may be in for more than just a few volatile weeks. I’m still not comfortable with any particular wave count from the top down in stocks. I can make a case for the decline being either a 3 or a 5 and the same is pretty much true with regards to the rally. With this secondary break though, we have approached the 50% correction target for the rally which is at 1,119 SPX (pretty much last nights’ low) and below that is the 62% at 1,107. The patterns may not be clear but those numbers are and I wouldn’t fight them.  

 The way treasuries came away from the lows of Thursday, especially with the upside gap on Friday, the rally looked very impulsive. Nothing wrong with that even if this is only a B-wave rally. It simply means there should be another following a nice pullback. Another upside gap this morning would have been troublesome but that risk seems to have passed. Some softening early this week would not be surprising but the gaps left on Friday need to hold. In the 10’s, that means 119-03 and at the same time, the 62% correction of the rally from Thursday comes in at 119-02+ so that becomes a great support area. The only sacred price above here is at the previous high as if this is the B-wave of a flat, then that is the target. I suspect that a secondary rally will develop and probably be done by late this week. Absent a clear break of the highs at 121-01+, I will label it the B-wave and look for another decline. I’m still thinking that at the end of all of this corrective action, the 10’s will target 3.10 with the 30’s aimed at 3.88 and I also still think that the 3^rd week in June is not a bad guess for the timing for those targets to be achieved.

5/14/10 – 8:15 – Both the 10 and 30-year futures closed yesterday just 1 tick higher than they had on Tuesday. On Wednesday they opened strong and sold off while yesterday they opened weak and rallied. Pattern wise that doesn’t seem to say much but the truth is that we reversed from a new low yesterday that had some real significance. The charts in yesterday’s report showed gaps, trend-lines and Fibonacci retracement levels on the 4 charts that I am most interested in. I ended yesterday’s report with this paragraph, edited slightly for sake of length; “Going back to the treasuries, if they were to reverse from any of the trend-lines, gaps or Fibonacci retracement targets mentioned . . .  and then close higher for the day – and it doesn’t matter when that were to happen - I would suspect it would represent the end of the A-wave of an ongoing correction . . .  If these markets are going to make another run Thursday’s best levels, it will almost certainly come from one of the above mentioned ‘technical’ areas”. I still feel that way and that makes what happened yesterday so intriguing. Consider that at yesterday’s lows, the cash 30-year poked its’ head through its’ trend-line drawn from early April and in so doing, traded into, but did not fill, the gap left back on May 4th. The low was more than 50% of the way back to the April yield crest. The 30-year futures filled their gap from the 5^th and traded 6 ticks through their 50% retracement target to 119-26 before reversing. Their trend-line remains untested at 119-07, inside of a gap they left on the 4^th. As far as the 10’s go, the futures held just a tick above the top of their gap from the 5^th and a little below their 38% retracement before recovering while the cash filled its’ gap by .002 with a trade at 3.607 while the gap filled at 3.605. The trend-lines there are at still pretty far off in the futures at 117-21+ and in cash at 3.646. While there is clearly still some very strong support should we head back down, those were some pretty good levels that held yesterday and those lows can prove to be important. And already this morning the 10’s have traded as much as a point off of yesterday’s lows – the 30’s nearly 1 point and ¾‘s. With a plenty of numbers coming today we could see backing and filling should they prove disappointing but I’m of the belief that we saw the low of the A-wave. The lack of a 5-wave move into yesterday’s low only goes to enhance that notion so while the levels hit could suffice for the completion the entire ABC correction, the wave structure still suggests to me that it was only the first phase.

The stocks backed away from an early print at 1,174 SPX and 10,920 Dow and there has been some carryover into the pre-opening trade this morning. S&P futures have traded nearly 30 points off of those highs already. Remember the targets posted in yesterday’s report at 1180/1185 SPX and 10,960/10,985 Dow. There’s no evidence yet that any sort of high is in, but those are the last levels I expected to see tested if we were not headed back to the highs and for now, I don’t think we are and those were pretty close misses.

The Dollar Index followed up it big day on Wednesday with another huge one yesterday and now sits at 85.39 while the trend-line drawn off the February 2002 top has a value of 84.44. That is a clean break for sure and it is also the 4^th daily close through the line. It will take a really bad rest of the day not to give us a weekly close through it as well.  This can prove to be really meaningful. Gold meanwhile, backed away from the highs that it made following a $65 explosion in just 3 days to an all-time new high. It isn’t hard to make a count that places it in the 5^th wave up from a low back in late 2008. Targets would be at 1257-1260 and then closer to 1373 to 1388, with the current high now at 1249.

The treasury markets have behaved about like they should if they are correcting from the extremes seen last Thursday; the excitement usually coming when that isn’t the case. I’ll do a more complete technical update for Monday but for now, I am of the opinion that the 10’s may have seen the low of an A-wave. If so, look for a strong rally but one that may not make it back to 3.26 in the 10’s before softening again. I’m thinking maybe 2 weeks of consolidation before a really strong rally commences and we may have already defined both ends of the trading range.

5/13/10 – 8:15 – For the treasury markets, yesterday turned into a quiet day with a downside bias and a close near the lows. While I had ‘hoped’ for a new low yesterday or even the day before to help with the analysis, the truth is that the patterns have still become pretty clear as far as wave analysis goes. We have now traded basically sideways for 3 days and for me, that is just too long to be the minor 4^th wave that I was looking for so the bottom line is that the entire move from the spike last Thursday now looks to be corrective. With no apparent 5-wave decline developing from either the extreme on Thursday or even the test of it on Friday, I now have to assume that everything that has happened since Thursday is an A-wave in the making. If true, then it could still be part of a flat correction or a triangle but in either case, the extremes of the range should be established with this presumed A-wave and the resolution of the entire pattern should be to new high prices. One could read the 30-year slightly differently but for now, the preponderance of evidence still seems to me to point towards higher highs.

With a bullish outlook down the road, it still does appear that near term, the markets are potentially vulnerable. And when I look at the support below, what is compelling is that there are now fairly significant trend-lines that are very near or in some cases, within the gaps left back on 5/04, in both the 10’s and 30’s. The values of the trend-lines for today are 117-18 in the 10’s and 119-01 in the 30’s – 3.658 and 4.501 in cash - but should we head down, we’ll want to pay close attention to the entire areas of the gaps as they are just as important as the trend-lines. You can see the values of the gaps in the support and resistance listed below. For now, those levels look pretty far away but the lines are rather steep and if we soften at all, keep in mind that as the market drops, those lines are advancing and the two can meet fairly quickly. Also in the same vicinity are the 50% corrections of the entire rally off of the early April lows. All of this collectively represents a lot of support and if it weren’t to hold, I will definitely be reconsidering what my lie ahead but for now, I suspect that the wave patterns as well as the large amount of support will work together to attract buying and support one more, strong rally.

Stocks seem to have returned to their profile from before last week which is to say they just don’t want to give up. While I can find negatives looking at the highs and what transpired out of them, I see nothing negative from what has developed since the lows. This current rally does look to be impulsive so when it ends – if it ends – the next decline will be the one chance to build a bearish picture by virtue of a hard impulsive decline. If I had to pick an area that I thought would hold this side of the highs, it would be near 1180/1185 SPX or 10,960/10,985 Dow.

The Dollar had another strong day closing above the trend-line from the February 2002 top for the 3^rd time, but it has yet to do so on a weekly chart, which I still suspect is what to look for. On Friday that line will be at 83.30 while yesterdays’ close was at 84.75. Gold meanwhile, exploded and closed in all-time new high ground. The high now stands at 1249 and 2 of my favored ways of projecting the end of an impulse once a 5^th wave has begun point to 1257-1260 as targets for the end of that 5^th wave.  Beyond there I come up with 1373 to 1388.

5/12/10 – 8:15 –  With a strong opening yesterday, the 10 and 30-year futures filled the gaps they had left on Monday before reversing and fading for the remainder of the day. The cash 30’s narrowed their gap but were unable to fill it. Such is the importance of gaps to traders for reasons that have escaped me since the advent of 24 hour trading, but work they do. At the worst levels of the day, both maturities held their lows from Monday by small amounts leaving them pretty much right where they were in terms of the wave analysis. I’m still forced to believe we are in a correction off the extremes seen on Thursday but that is not yet confirmed. The equities did make new recovery highs before fading and that gives the rally there the appearance of a 5-wave move, although that too is not yet a certainty. The bottom line is I see no evidence that my bullish count in bonds is incorrect although I now see no good evidence that stocks are going to lend a helping hand.

I am not a big fan of using futures continuation charts for long-term analysis, preferring instead to use cash charts. The reasons are too numerous to mention but I would feel remiss if I didn’t point out the fact that at that extreme high seen on Thursday of last week, the 10-year futures printed 121-01+, just half a point below the all-time high posted in December of 2008 when the cash 10’s yielded 2.03 – a 96% retracement of the entire bear vs. 38% in cash. Don’t’ ask me how the basis can change that much as I wouldn’t have a clue but it certainly would muddy the water with regards to wave counting if I were to use the futures chart in conjunction with cash. I’ll keep that little nugget in mind the next time we are trading in that area, however. In case you’re wondering, the 30-year futures had recovered only about 58% of the same move vs. 34% in cash.  

Volume in the stock indices yesterday was off considerably from the previous several days but that is difficult to interpret as they traded both sides of unchanged and really never made a statement one way or the other. Above them remains a top at a perfect Fibonacci target as well as a small ‘head and shoulders’ topping pattern but below is that extreme print right against the February lows in the Dow, a trade that has to look great to any bulls who were waiting for a correction; even if that one was a bit too fast to take advantage of. It’s just going to take a little longer to get a handle on what is going on in the equity markets.

The Dollar Index, which suffered a hard break on Monday following the bailout news from Europe, recovered nicely from the lows and extended the rally yesterday. That market, while overbought on both daily and weekly charts, shows no other obvious signs of an impending top as it has just recently come through a significant Fibonacci retracement level as well as a long-term trend-line. It is that trend-line, however, that can still prove to be a problem as it has only been broken by a very small amount and not yet on a closing basis on a weekly chart. Since it dates back to 2002, a weekly chart is about the only way to view it so that really does matter.

Gold had another big up day and in fact, traded through the previous all-time high posted in December. I haven’t yet worked on any targets up here but there is a good possibility that it is in a 5^th wave from the lows in October of 2008 so I guess it’s about time to do so.

So at the end of the day, I’m still in a ‘wait and see’ mode with regards to bonds but I really do want - and expect - to see new price lows of this current push, made today and as addressed in yesterday’s update, the area of 3.51 would then become critical. The futures equivalent is at 118-28+ but I am a little more focused on cash than futures as far as these patterns go. In the 30-year, the equivalent levels are at 4.347 and 121-12. I will say that basis the futures, the 50% retracement of the entire rally out of the April low is all the way down at 117-30 while an up-trend line drawn off that low is further still, at 117-15 so if buyers don’t emerge on any break below yesterday’s lows, things could get pretty dicey.

5/11/10 – 8:15 –  Following the wild and crazy price swings of the past 3 days, trying to read the very short-term patterns can have the effect of causing you not to see the forest for the trees. Still, given that I have a preferred wave count calling for still lower yields, what I find myself tasked with doing is trying to determine if those ‘very short-term patterns’ which are unfolding during the initial stages of this yield rally, are consistent with my preferred count. So far, things look about as they should but it is still too soon to make a definitive statement. That having been said, I am expecting to see a 3-wave corrective rally develop and I am encouraged by the action so far. I know this is going to get a little thick for this early in the morning but here’s what I see complete with a picture if the thousand or so words aren’t enough.

Consider that from the 3.26 trade on Thursday, yields shot up to 3.51 on Friday’s opening before collapsing back down to 3.29 by mid morning. If one is trying to count waves, then that would have to represent either an ‘A’ and a ‘B’ wave of a correction or a wave-1 and a wave-2 of an impulse. From the low on Friday, yields moved back up to just under 3.45 before trading sideways for the remainder of the day – another 1 and a 2. The explosive gap up in yields yesterday morning would figure to be the 3^rd wave from Friday’s low yield and the downward drift all day long yesterday would be the 4^th wave from Friday. From the next new high yield above yesterday crest at 3.586, it will look as though we are completing either the C-wave of an A-B-C off of the 3.26 trough, or the 3^rd wave of an impulse. If we impulse back down in yields from any new high, we could be in for another big price rally. Should we correct back down, the possibility of an impulse to still higher yields will become very real and a great deal of caution will be in order as my bullish count could be in jeopardy. All of this may sound confusing so I am including a chart to help clear things up. I’ll call it chart#1, the one with the green bars (keep in mind that the price scale on the right side of the chart is off by a decimal place so 35.00 represents a yield of 3.500). Should we make a new yield high above the 3.586 posted yesterday morning however, we’ll have a new tool to work with. That first yield rally that terminated at the opening on Friday at 3.51 was, as mentioned above, the wave-1 in any potential impulsive count and it is depicted on the chart by the red horizontal line. That means that should we complete 5-waves up from the yield trough later on Friday, that would end a potential 3^rd wave and at that point, 3.51 becomes a yield that cannot be broken if the 10’s are in a 4^th wave correction. Remember, wave theory doesn’t allow for a 4^th wave to trade into the area of the 1^st wave so if 3.51 is broken from a new yield crest above yesterdays’, that would force the labeling of the entire yield rally that began on Thursday, a correction. It may not be complete and the final form of it may still be in doubt but an impulse wave is one thing that shouldn’t develop. That will be the first real test of the wave count off of the bottom. To be perfectly clear, it does not matter if we trade through 3.51 now as we cannot currently be in the bigger 4^th wave but rather, we are likely in a smaller degree 4^th wave of the yield rally that began on Friday. The 1^st wave of that rally was close to 3.45 so breaking through that area first would have the effect of making the move out of Friday’s trough a 3-wave move. Time analysis would suggest that the new high in yields should come today although if it doesn’t, I wouldn’t call it a deal breaker and with the early bid this morning, it seems not so likely. Keep in mind that this correction, if it proves to be one, can still develop into a triangle and this might only be the 1^st of 5 legs but it would still likely define the range of the entire triangle. The bottom line is that 3 waves up means correction and new low yields to follow while 5 waves up mean impulse and – well – perhaps a new outlook.

5/10/10 – 8:15 – Anyone who didn’t believe that the 3.266 trade in the 10’s on Thursday was real should have been convinced by the 3.297 trade on Friday, especially given that Friday’s trade came following shockingly strong NFP numbers. With all the confusion about just what had caused that short-lived crash, there was a school of thought that said to ignore the extremes, at least for purposes of wave counting and other technical analysis, at least until there was some consensus about exactly what had happened. But the 10’s made it clear on Friday that the 3.26 trade on Thursday was no fluke. As far as stocks were concerned, even if it weren’t as convincing as that 3.29 print in the 10’s, Friday’s low in the SPX was 1094 and while that may have been 30 points above the ‘crash’ low on Thursday, it was also nearly 130 points off of the highs of the move made just 9 days ago which still makes this the biggest break since the bottom last March - and by a considerable amount. So when we closed on Friday, to me it looked about the same as it had on Thursday which is to say that the 10’s had crested in their 3^rd wave while the stocks had bottomed in either a 3^rd or a 5^th. Then came the weekend and a strong bid back to equities and I do mean strong. The S&P futures are up in the 50 pre-opening market and with that went the bid for bonds as the 10’s are off more than a point. That 3.29 print in the 10-year following the 290,000 new jobs reported was enough to convince at least me that they are still headed close to 3% even if now there may be reason to wonder. The area of 3.25 had always figured well as a shallow objective for this move but the way we got there makes me think it is not the end. As far as stocks go, I still think they are headed lower but I would be crazy not to look at the prices this morning as challenging my bearish count so I plan to take a step back for the day and see how this plays out.

For now, assuming the 10’s are in a 4^th wave correction, there are several forms that the correction could take. The 2 most likely are a flat correction or a triangle. Either of those should have a choppy 3-wave decline for the A-wave so the first thing that will alert me that I may be incorrect will be the development of a 5-break. Clearly we are off to a good start but that means little now as it will be more about how things go once this first push ends and a bid returns. A 5-wave decline wouldn’t put an end to a corrective scenario but it would make me step back and question the count. The only impulse wave I could ever count from 4.01, ended at 3.822 so as far as I am concerned, that is the wave-1 yield bottom and the only yield that I can’t tolerate as part of a 4^th wave correction. Volume increased on Tuesday, Wednesday and Thursday, all strong up days, until reaching levels not seen since January of 2008 but Friday’s was about the same as Thursday’s and that too suggested that the rally had run its’ course for now. I had felt that way when I wrote Friday’s update but didn’t see this coming. For the next several days I will be watching wave patterns as well as how the market reacts around support and resistance

Not only do I still like the wave count calling for a new high (low yield) in the near future, but now even the 5-year is beginning to look like it could have the same wave count as what I am using for the 10’s and 30’s. While my preferred count points to objectives in the 10’s that are about 33 bps away from Friday’s close and in the 30-year about 38 bps, now even the 5-year can be in said to be in the same wave placement with objectives about 42 bps away. For the next few days, I will be watching the wave structure on all 3 maturities for clues that the counts are either still working, or breaking down.

I must say that beyond using wave theory for my analysis, the next most important thing to me is how a market acts at support and resistance and that is the one thing that really disturbs me. The 10-year came awfully close to a 3.25 yield which has been an area I’ve labeled as a minimum objective for quite some time. At the same time, the Dow nearly perfectly matched the February 2010 low and that was about as obvious a support point on the charts as anyone could have found. Either one of those levels – or even both – are good enough to support a true reversal but the wave based evidence that I see still suggests otherwise.

5/07/10 – 3:15 – The only place I know to start this report, which is all about bonds, is to talk about stocks. The first headline was that the Dow fell 1000 points before recovering to close down ‘just’ 350. But then, reports surfaced that an error made by a single trader may have caused the ‘flash crash’. By some reports, several individual stocks actually traded at ‘0’ but we all know that isn’t possible – is it? Whatever happened, during the melee the 10-year, which had been trading at 3.41% at 2:40pm and was at 3.40% at 2:54, managed a trade at 3.266 at 2:46 and unless they can find a way to execute a ‘do over’, that is the data that we are dealing with. And based on that data, the 10’s have now confirmed that they have been an Elliott wave ‘flat correction’ since June of last year with current sights set on 3.10 for the end of the C-wave of the correction, now possibly even coming in conjunction with the mid-June timing. Could it really be that easy from here? Probably not but the pieces of the puzzle do seem to be falling into place.

While the crisis in Greece and possibly their neighbors was the likely cause for the selling that had persisted all day long and carried the Dow down over 300 points by 2:45, it didn’t take long before blame for the ‘crash’ that took it down another 700 points in just a few minutes, was placed elsewhere. One story is that an error on an order entry added enough zeros to a million share order to make it a billion share order instead - and computers took care of the rest. More blame was put on ‘high frequency trading’. Whatever the case, the amount of money that the break represented is such that we’ll be hearing more of this story for quite some time. Apparently, some exchanges are cancelling trades that occurred between 2:40 and 3:00 that were beyond 60% from the 2:40 print which suggests that they think a mistake is at the root of the break and that it is unprecedented as far as I can recall – at least on this scale. And I can’t help but wonder how that would apply to futures traders of the indexes that went south with the stocks. I guess they’ll be plenty of stories about the cause and effect of what happened but the truth is that even if that error is to blame and if hadn’t happened, we’d still be having the same conversation; the difference being that the Dow would have ‘simply’ closed down 350 points and the 10-year would have ‘just’ run to 3.41; both levels representing fairly remarkable days themselves. While more than half of the day’s losses were recovered in just a few minutes, the 347 point drop in the Dow on the close would certainly have made headlines even had the index not been down 1,000 intra-day. Error or crash? For now, it is what it is leaving the best 2 counts for stocks, as far as I can tell, being that that they either bottomed in a 3^rd wave off the top, otherwise the count I showed on the chart yesterday was correct and what followed was the 5^th wave. It is unusual for a 5^th wave to be so large but not impossible. One thing I doubt is that yesterday will prove to be a real bottom. The lows could certainly hold for quite a while since – assuming they really occurred – they were very close to good support with the low in the Dow coming in at 9,872 while the last swing low back in February was at 9,835. But for me, the most important issue is still that the highs came in at perfect bear market rally ending targets and we have not yet even retraced 30% of the bull market – 15% if you exclude yesterday’s late day freefall.

One problem I do see going forward is that I rely heavily on support and resistance for my analysis and that will be more difficult for at least a few days and maybe longer. Yesterday’s explosion pretty much wiped the slate clean of numbers and until I can get a better grip on just where we are in a wave count, near-term numbers may prove elusive. This is especially true for futures since they pretty much made it into uncharted territory. The fact that pre-opening today the 10’s were off ¾ ’s of a point with the 30’s down 1 ½ brings them back into more realistic areas but for the next several days at least, we may need to lean more on cash than on futures. It would be funny if it weren’t so scary that one individual could make one simple mistake on one order and the effects could ripple through all of the financial markets including bonds, the dollar and gold. That needs to be fixed. For the record, the Dollar Index broke above a trend-line drawn of the February 2002 crest and that happened before the afternoon crazies. Gold meanwhile burst through the 1189 target that I had, bringing the all-time highs back in the crosshairs.

When the 10’s began to rally hard several days ago I suggested that based on wave theory, if they were going to do any better at all, they needed to truly explode and with few pullbacks. I also suggested that the areas of the gaps left on Wednesday needed to hold if tested, even with the jobs data coming up. At the high yield yesterday which occurred at 8:30, the 30’s perfectly filled their gap and reversed; the 10’s never made it back to theirs. This all unfolded in a fairly predictable manner price-wise even if there was no way to foresee the speed with which it all came to pass. In all probability, the 10’s have now seen the end of their 3^rd wave and have entered into a 4^th that should last several weeks. The target for the 5^th will be something close to 3.10 and mid June is not a bad guess for timing. I had always viewed the 3.25 area as a potential objective for a shortened C-wave but despite the importance of that area and the fact that at least part of the rally came for reasons that are being down-played, the wave patterns continue to suggest we have more upside left.  It is what it is.

Oh yea. The jobs data was released and showed NFP to have risen by 290,000 vs expectations of 197,000! The biggest jobs gain in decades. And what did the bond market do? At first it did nothing but then it began to rally. In fact, were it not for yesterday, we would be making new highs of the move on that number and that would truly be remarkable. billy@tbondtrader.com

5/06/10 – 8:15 – What a day! While the wave structure during the initial stages of the rally forced me to adopt the A-wave count which suggested that 3.53 was about as far as the 10’s were likely to run, now things are not so clear. There is a 62% retracement number at 3.45 that works for that count but I still felt that 3.53 was a reasonable level to view as likely to hold in all but the friendliest of scenarios based upon, among other things, all of the other nearby levels that needed to be penetrated just to get to 3.53. If you recall, I had mentioned how when viewing weekly charts, the most friendly of scenarios which called for another run at 3.10 in the 10’s looked like the best count, but wave work is all about reading the internal structure of waves as they develop and for that, you must shorten up your charts. The bad news is that I didn’t expect this much upside this week and wasn’t really long but the good news is that I did expect upside and was never short. From here, things can really get interesting as no matter how far we rallied an how much resistance we traded through, If we are in that large impulse wave, then we need to continue up and fast and at the same time, there are limits to how far back down we should expect to see the treasuries retrace before this new found bullish look will have to give way back to the not so bullish look that they had developed in the first month of the rally. That determination may be made very soon.

Following upside opening gaps yesterday, the highs in the 10’s at 119-04+ in futures and 3.488 in cash, occurred at 9:40, the precise time that the stocks were making their lows. The treasuries spent the rest of the day drifting back down and closed about mid-range in futures but closer to the lows in cash. While some backing and filling can occur if we are in a 3^rd wave, there is a limit to just how much of a pullback I would tolerate. I think I mentioned a few days ago that what was needed to give the charts an impulsive look was an all out price explosion. That would allow for the labeling of much of what happened prior, as a bullish correction whereby the B-wave made new highs and thus explaining why the rallies wouldn’t count out as 5-wave moves. Well, a price explosion is pretty much what we got but now, if we count the prior action as a bullish correction and all that has happened over the course of the past week as part of a 3^rd wave, then we shouldn’t back up very far since the 3^rd wave would not likely be finished. For starters, if we are in an impulse wave, then the area of yesterday’s gap should represent support and even with jobs data out of Friday, that area should attract buyers if tested. Certainly the worst case scenario would be to weaken dramatically into the opening today and gap back over 118-10 leaving an island above. As far as the gap left on Tuesday, that one should absolutely not be seen again if we are in a 3rd wave and the truth is that if that is where we are, then this wave needs to extend. In a typical impulse wave the 3^rd wave is the largest of the 3 pushes and currently, from the yield crest at 4.01 to the best levels seen yesterday, the 10’s have only covered about 58% of the distance to the 3.10 target. Were we to correct now in a 4^th wave, then the 5^th wave would need to cover more ground than waves 1 through 3 combined and while not impossible that would be quite uncommon. So following a wonderful 5-day rally that has covered nearly 30 bps and taken out all but the very last obvious obstacle on the path to 3.10, absent an extension without a pullback into the area of Tuesday’s lows, this is still very likely to just be the top of the A-wave of an ongoing sideways correction.  

As mentioned earlier, the rally in bonds was clearly a function of the sell-off in stocks so as we move forward, the next big move in stocks may still be the key to the next big move in bonds. As promised yesterday, I’m posting a chart of the SPX with what I think are the 2 best alternatives with regards to wave counts. There is even a nice sub-division to the second sell-off. To simplify it, we have likely either come down in an ABC that is finished or we have come down in a 1-2-3 which would only be the initial 2/3rds of a larger initial impulse – to be followed by another. There is a more bearish count that would have the 3^rd wave not yet complete but that we can save for another day. For now, the stock market needs to make a stand or else it may be in for a lot more downside.

5/05/10 – 8:15 – Finally something to get excited about - if not for treasuries gapping up to clear new highs, then for stocks breaking down to clear new lows. Based on my wave analysis, neither comes as any real surprise but to be honest, I was beginning to question my work on stocks. The wave structure of every decline since the 15^th has made another seem likely but they’ve come so reluctantly, the analysis was becoming difficult to trust. Yesterday, however, stocks broke and they broke hard and with the break came a fresh bid for treasuries. The cash 10’s remain in a nearly perfect channel from the 4.013 print on 4/05 with yesterday’s low yield of 3.605 falling just short of the lower boundary of the channel which had reached 3.602 (the value of the line today is 3.589). From 3.60 down to just below 3.54, there is very strong resistance every 2 bps and it seems that it will take a continued weak stock market or a very soft NFP number to press yields below those levels. That said, in no way do I think that stocks cannot continue to get hit, especially having come off of such great targets, and as far as NFP is concerned, well I just don’t have a clue.

The gap openings in the treasuries are the kind of action that can change the look of the charts to more impulsive structures. The gaps themselves are not enough but follow-through and the inability to come back and fill them can lend some 3^rd wave characteristics to an otherwise dull rally. Now with the gap fill area at 3.688 and my break point at 3.537, that’s just a 15 bp range with major numbers just 3 days away. The volume yesterday was more than double that of Monday and with the strong push, there is no longer any negative divergence on the daily stochastics so there is little in the way of negatives that you can find. I still view the rally as not looking impulsive but if the treasuries had another day like yesterday, it would be hard not to view what would then appear as a price explosion, as anything other than a 3^rd wave, making the count of what had happened prior, academic. I don’t expect that to occur but just so you know, if the gaps make it through Friday and if 3.53 doesn’t hold – 4.373 basis the 30’s - then 3.10 once again becomes a very realistic target.  

When the stocks first broke back on the 15^th, it seemed to be all about Goldman Sachs and when they took a secondary hit earlier this week, again GS was in the news but so was the oil leak in the Gulf. Yesterday, both BP and GS remained relatively well bid all day long while the broad indices took a real nosedive, putting in their worst performance in quite some time. I had mentioned a potential ‘head and shoulders’ top developing in the SPX and now, one has to wonder just how important the topping action of the past several weeks really is. The 3 highest volume days since mid-April have all been down days and while stochastic oscillators are approaching oversold conditions, they are coming off of bearish divergences. Also worth pointing out is the fact that the stochastics had been overbought for more than 2 months so who’s to say how long they might remain oversold. I had mentioned wave equality targets for the Dow and the SPX that were at 10,904 and 1171. Those are targets based on the notion that stocks were in simple downside corrections. Both levels were broken but both markets recovered to close above them. What I would take from that is that any new lows will begin to look like there will be quite a bit more downside, both with regards to time and price. Right now there is a very plausible wave count that would have the SPX in the middle of a 3^rd wave of the initial decline from the top. I’m not there yet but the next few days will be critical. I have doubted the stock market rally for a while now so rather than just sounding like the boy who cried wolf, I’ll try to be patient and await development of the really important wave, which for me will be the rally out of a secondary decline. That is the one that will tell me if this is a simple correction, or the beginning of something much larger.

For me, the levels to play off of today are obvious. If the gap left on yesterday’s opening gets filled at 117-22+, the prospects for further improvement in front of Friday would seem unlikely so that becomes my stop on any longs. At the same time, any push into remaining intermediate resistance will offer a great opportunity to flatten up on positions. Unfortunately, there are 4 solid levels between 118-14 and 119-06+ in the 10’s so the choice there is not so clear but watching them with one eye on cash for a confirming test of resistance should make the task easier and at the same time, any 8-10 tick failure from one of the resistance areas in futures would be a strong suggestion that the high would be in - at least for the day. I don’t have any obvious support nearby in the SPX that is critical but the wave structure suggests that one more new low might be all that is needed if we are nearing the end of a correction. Since yesterday’s lows were below my wave equality targets, if I were a bull, I would not want to see any more than a brief journey below them followed by a quick recovery and a higher close.  

5/04/10 – 8:15 – An inside down day in treasuries yesterday left them about where it had found them; aimed at higher highs. There’s still no real evidence that any sort of high is in place and an overnight bid seems to put the current highs in the crosshairs for today’s opening. Any reversal from a new high now may very well be from the best levels we’ll see in front of the jobs numbers on Friday. A lot of numbers were released yesterday morning but for the most part, they came in about as expected; construction spending and ISM manufacturing being the only 2 that were clearly unfriendly. A strong rally in stocks didn’t help out the bond market either and by the close, the 10’s had retraced a good chunk of Friday’s rally though not enough to mean much. The best support remains just below 117 as well as at the overhead channel line shown on the chart I posted yesterday which has a value today around 3.75. Were that line to get broken, it would be the first solid evidence that we may be on the way back towards 4% but still far from a confirmation. Conversely, I still like the area of 3.619 as a good spot to sell in front of the upcoming jobs release. The early forecast for NFP is +197,000 which would be the strongest number we’ve seen in well over 2 years.

I mention gaps in the treasuries so often that I have to mention one that I was paying attention to yesterday. It wasn’t in bonds or the SPX or even in Goldman Sachs. This one was in BP, as in British Petroleum. Prior to the explosion on their oil rig, that stock was trading at about 61 and it was still at 57.34 when it closed last Wednesday. But Thursday, as the news got worse, it got crushed down to 51.88 and then stabilized on Friday. But as the slick got bigger, the market got softer and yesterday, it opened with a huge downside gap which began at Friday’s low of 51.36 and extended down to the opening yesterday at 49.36. It traded down to 47.35 before there were any buyers to speak of but once it started back up, it just kept right on going – that is until it got back to 51.29. A near $4 rally that fell just .06 shy of filling the gap before turning down once again. It closed lower for the day but higher than where it had opened which is a sign of hope. I have no vested interest in tat stock but surely hope things play out better with regards to the leak than they way they currently look. All I know is that technical trades like that are a beautiful thing to watch.

I had said yesterday that the stocks made more sense to me following Friday’s sell-off than they did after Thursday’s rally so as you can imagine, following yesterday’s rally, I was back in the woods. Now I wake up this morning and see the futures headed back down and I’m beginning to get dizzy. It is the 5-wave structure of the breaks that has me confused as the overall sideways movement since 4/15 is very corrective looking. Now there is a potential ‘head and shoulders’ look to all that has happened since 4/15 but another day like yesterday and that will no longer be the case. The ‘left shoulder’ came in around 1214 so that general area is the logical resistance from here. The highs aren’t far off at 1219 and the perfect Fibonacci target remains at 1229 but a move back to there will likely result in the Dow making new highs above those already posted at the Fib. target. I would suspect that if we cannot manage a higher close today, then we’ll have to await the news on Friday before the next strong rally could develop.   

5/03/10 – 8:15 – We’re closing in on levels in 10’s and 30’s that are very important and with the jobs report at the end of the week, I suspect that the rally will stall at one of the several, as yet untested resistance levels left leaving the news to determine what comes next. I don’t want to spend too much time repeating myself about the wave structure as I think I’ve said about all that I can during the past several weeks. There is, however, one thing I do want to add to my clearly stated opinion that are probably in the early stages of a sideways correction that could last for months. When I get past the intra-day and even the daily charts that have helped me arrive at the conclusion that the treasuries are correcting the yield rally that began in October, and I look at the patterns on the weekly charts, I can’t help but think that the prospects for the 10’s to go back to 3.10 is still very real. I can’t support that notion based on the way that we’ve rallied so far, but the simple fact that both the 10’s and the 30’s printed near perfect double tops against the June 2009 yield crest makes the idea that we have been in a large sideways correction since June too compelling to dismiss just yet. For now, I still see only marginally better levels ahead in what I believe to be the A-wave of this correction but the jobs data can make or break either of the 2 wave counts - shorter term chart patterns notwithstanding. Keep in mind that the yield curve, as measured by the spread between the 10’s and the 30’s, is dynamic and changes nearly every day and yet when we printed the yield highs in early April, both the 10’s and 30’s were at almost the exact same yield levels they had been at 10 months earlier. That is unusual to say the least and difficult to get out of my mind when I look at the charts and try to make a wave based projection, given that the typical pattern of a flat correction calls for the B-wave to double print against the point of inception of the correction. For now, I’m sticking with my call that the extreme for this current rally is in the mid to lower 3.50’s in the 10’s but I am mindful of the bigger picture and don’t care to head into Friday’s report with any real exposure.

After the rally in stocks from Wednesday through Thursday that recovered nearly 75% of the ground lost from the highs, Friday saw most of the gains given back. The entire pattern going back to 4/15, the day the Goldman Sachs news broke and took the broader markets with it, has been very corrective looking but the 5-wave break from new highs on Monday left the patterns begging for another sell-off. At least now, they make more sense to me than they would have had the rally simply extended. Now the SPX has a wave equality target at 1171 that will be the first spot that I could expect a turnaround if we are in a simple correction. The equivalent for the DOW is at 10,904. I for one don’t think you can underestimate the potential significance of the area that stopped the rally – so far – as it represented nearly perfect Fibonacci targets in both major indices. If we do soften early this week, the general area of those wave equality targets seems likely to hold for the same reason that the 10’s seem likely to stall - namely that the jobs data is just too important to ignore. One other thing that I think is worth mentioning is the fact that the first hard break in stocks since February came concurrent with the news that Goldman Sachs had been charged with securities fraud and Friday’s break seem to commence with news of possible criminal charges. One thing that seems apparent is that the market in general does not like the prospects of problems with Goldman and that story seems likely to be with us for a while – for better or for worse. And now there is still another threat looming in the form of an oil slick in the Gulf of Mexico. That not only has potential serious repercussions with regards to British Petroleum stock but it has potentially serious repercussions for the entire Gulf Coast and perhaps well beyond with regards to both the economics and even liabilities. There is a lot of uncertainty about the future of this disaster and we’ve all been taught that uncertainty is not a good thing for the markets.

In addition to the upside break in treasuries and the downside break in stocks, Friday was also a big up day for gold but it too is approaching key resistance at 1184 and more importantly, at 1189 basis the front month futures which closed Friday at 1179.70. Additionally, the dollar seems to be showing signs of fatigue. It remains strong and in a clear up-trend but with a 62% retracement target as well as a multi-year trend-line within 3 points of Friday’s close, that market may need some backing and filling as well even if those levels aren’t quite as close as some of the others I have mentioned. It seems like all of the markets are within easy striking distance of major levels as we enter the week that ends with the biggest economic news of the month.

As for the treasuries, weekly oscillators are still pointing towards lower yields although the dailies are not. They are overbought and with bearish divergences. That is another reason to think that treasuries may back up in front of the unemployment report. Volume is difficult to interpret as it remains strong on the up days but lest we forget, it was very strong on the big break last Wednesday as well. Open interest continues to basically expand with no real bias towards the up or the down days. Maybe we get enough pattern development this week to allow for a more definitive short-term call but no matter what the short-term patterns look like, extreme caution will be in order as we head into the jobs data or for that matter, even into Thursday which on a handful of occasions has produced fireworks in front of the jobs news. For the very near term, the first support of any significance is just under 117 and any pull-backs that don’t extend to there, mean very little. You can see below what I think is important resistance and I will be watching those levels closely as I suspect one of them will put a lid on the rally for the week, assuming it is not already in place. If I had to pick one, it would be 3.618 in the 10’s with 4.46/48 in the 30’s almost equally as good.