^_Tbondtrader

10/30/09 - 9:00 a.m. - What a week to be trading news. A strong market on Wednesday followed news that Consumer Confidence had dropped way more than anticipated and then yesterday, the markets took a hard hit following surprisingly strong numbers for GDP and consumption as well as tame Price Index numbers and better than anticipated jobless claims. So it was only appropriate that this morning's PCE, income and spending numbers came in right on the screws. If we can retain current levels, we'll have a weekly, upside reversal following a terrible close last week.Can you say 'chop'. All in all, this is good news from my perspective as heading into the week, I viewed the markets as on the ropes with anything other than a hard break to the 116-18 area to be a welcome surprise. What I got was a break to 116-28, which caught a channel line, and then a solid reversal. While not sure we are out of the woods just yet, things look much better technically than they did just a week ago.  

While the longer term wave structure has not changed, the shorter term patterns can be viewed as improving. That said, the 10's need to stay north of 117-16 going forward to keep the heat off with 119-01 the area I want to see taken out to project us back to new highs. The daily stochastic, the one thing than flashed warning signals of an impending rally early in the week by virtue of bullish divergences coupled with oversold readings, has moved up nicely and has room to improve further although it should be noted that current readings are closer to overbought than oversold. The weekly readings are still a concern as they have just begun to point down. A good close today and another next week would help that picture immensely but that is getting way ahead of myself, especially with the jobs report coming next week. Given my feelings regarding the importance of both of those above mentioned levels, I would view that range - 117-16 to 119-01 - as one that could easily contain prices into next Friday's numbers so selling rallies and buying dips may not be a bad idea. One last thing on the technical side goes back to those long-term moving averages on the 10's and 30's. Having seen yields move above those averages for the first time in several months on Monday, only to trade back under them on Tuesday and Wednesday and move back above them yesterday, we are once again on the 'good' side of those averages. For the record, the numbers for today are 3.47 in the 10's and 4.29 in the 30's and those might be viewed as pivots of sorts at today's close. 

Two stories I've read, one yesterday and one this morning, are worth pointing out as collectively, they can have major implications to what we all watch and do. Yesterday a story came out of Moody's saying they will be reviewing all U.S. home loan securities, likely leading to significant rating downgrades based on the outlook that housing prices are not likely to bottom until late next year. That not only could adversely affect balance sheets but it could reduce demand for mortgage products as well. This morning, I see a published story regarding the Fed's mbs purchase program as they near the end of their trillion dollar plus purchase of mbs. The Fed actually now holds more mbs than treasuries and the concerns are not just that once they quit their purchases, it will leave a large hole in the demand side of the equation but in addition, they will need to sell off somewhere near $1.25 trillion back into the markets. It certainly seems that mbs security downgrades coupled with a decrease in demand and an increase in supply will eventually put significant upward pressure on mortgage rates but that will a subject we will have to address at a later point in time. 

The stock market had a good day yesterday but let's not lose site of the fact that the SPX had slid from 1,100 to 1,042 in just 6 days and was getting way oversold. At 1042, the decline off the top was equal to the decline from the highs of 9/23 to the lows of 10/02 which is always a relationship that interests me. Back over about 1,080, new highs will seem likely so as we sit here near 1,060, the next 12-15 points in either direction can prove very telling. 

For the remainder of the day, I will be viewing a move up to the 118-14/16 area as likely to be a good place to take coverage while a trade back under 117-26 would be negative and reason to take coverage as well. A close below 117-19 would be reason to be fully covered through the weekend but that seems unlikely. Seemingly equally unlikely would be a trade above 118-27 but should one occur, it would create an outside up weekly bar and that would be enough to cause any bears to run for cover.

10/29/09 - 9:00 a.m. - After staying up till the wee hours of the morning playing with some new software that we may all be able to benefit from at some point, I'm struggling to see the screens. Following a terrible day on Monday, the treasuries rallied hard on Tuesday and again yesterday, breaking above the channel that had contained them at the lows but this morning, some good economic news was more than they could stand and the markets have begun to retreat. Bettering the streets' estimates were GDP, Personal Consumption, GDP Price Index (lower than guesses) and Continuing Claims and with that, the treasuries slipped back into Tuesday's range. The potential wave counts have become to numerous to list, let alone prioritize, so I'm going to need some time to figure out what all of this means but when the wave work doesn't guide me, price action is my fall-back and that's much easier to read. A break below 117-21 would leave only 117-13 as a downside target before I would once again be looking for a better test of 116-18/21. A move back up above yesterdays' highs would likely find resistance at 118-16/18 and if that gets taken out, then only 118-25+/27 will serve as a barrier before we likely test the previous highs. One last thing of note are those long-term moving averages I addressed early in the week. They were violated in the 5's, 10's and 30's for the first time in several months on Tuesday but this morning they have once again come into play. For the record, the averages are as follows: 2.427 for the 5's, 3.471 for the 10's and 4.291 for the 30's. I will view them as pivots of sorts on a closing basis.

Not to be ignored is the good ole stock market which, following a poor performance on Monday and Tuesday, did a swan dive yesterday, closing below the major up-trend line drawn off the March bottom in the S&P's. The Dow has fared a little better of late and a ways to go to catch up with the broader index it is fair to say that for the first time in more than 3 months, the health of the rally can be brought into question. Trend-lines tell us a lot about the health of a market but they cannot be trusted for short-term calls so by waiting for a rally to develop and then seeing how it does with regards to the those lines, it should become much clearer just how important the recent highs are. That said, wave work is hard pressed to place the stocks in anything other than either a still unfolding 3rd wave, or a still unfolding C-wave so in either case, the lows are not likely to be in. I'll address that again tomorrow but for now, stocks should remain on the defensive and if that isn't enough to turn the bonds back up then they could once again be in trouble. 

10/28/09 - 9:00 a.m. - The Treasury markets apparently aren't about to give up; at least not without a fight. At the close on Monday, things looked pretty bleak but a surprising turnaround yesterday, helped along at first by a report that showed a surprisingly soft Consumer Confidence number and then by a great 2-year auction, the treasuries came out of the large hole they had dug leaving me to wonder if my bearishness needs to be pushed to the back burner for a while. I'm not their yet but at least now, the markets are within striking distance of levels that would force me to re-label the wave count. 

While the markets had worked their way back to the obvious resistance in the upper 117's prior to auction time, the 44+% number of indirect bids for the 2's, which include foreign central banks, was enough to help the long end of the market overcome its' resistance and post significant reversals. It's always difficult to understand why the long end would react so violently to a good auction for the short end since it remains to be seen if the foreign investors bought the 2's as a substitute for longer dated securities, or because they have a real appetite for our debt - again. We'll get a better read on that at the auctions of the 5's and 7's later today and tomorrow but the truth is that the 5's are usually a solid coupon at auctions and there is no reason to think this auction cannot go well. In addition to the solid auction, it was reported yesterday that Consumer Confidence dropped from 53.4% a month ago, to 47.7% now while most of the players were expecting a number closer to unchanged. There is also a growing sense that investors are losing their appetite for riskier assets as can be seen by the softening equity markets and the widening of spreads in corporate land. Risk aversion will certainly help out the treasury markets but it remains to be seen how much. 

When talking about risky assets, the quickest and easiest way to view how investors are dealing with them is to look at equities and there, yesterdays' price action can prove telling. At the lows of the day in stocks, the S&P futures traded at 1057 while a trend-line drawn off the March low - the definitive uptrend-line in that market - was at 1056.25. That market has made new lows overnight so we are about to find out if the up-trend has been altered - at best. The cash market remains above its' trend-line which has a current value of 1055 while the close yesterday was at 1063 but still, that market is at a crucial point with regards to the health of the rally. 

In mortgage land, spreads widened yesterday as one might suspect when risk trades are being unwound while at the same time, mortgage apps. were reported to be down 12.2% for the week with the refi index down 16.2%. Both are likely to have been influenced by the recent move up in rates. And if a forecast of housing prices is what you need, then we've got one for you...or actually 2. Goldman Sachs, in a letter to clients, said they are looking for prices to retreat another 10% or so in 2010 while Merrill Lynch is looking for some 'subded appreciation' for the next several years. Take your pick.

So the question now is 'what are the bonds doing'. While yesterday's low was 6+ ticks above my target zone which includes previous lows, Fibonacci retracement targets and wave equality targets, it was just a tick from nearly as good of an objective. The lower boundary of a channel constructed from the July highs came in Monday at 116-27 while the low was 116-28. Channel targets are similar to wave equality targets but sensitive to timing and since the second decline to the lows on Monday was several days shorter than the first, the channel line was still above the 116-19 wave equality target. Only time will tell if that will suffice as a test of the support and with the upper channel line at 118-05 today and the current high being 05+, things could get pretty interesting. I had pointed out that there was a developing bullish divergence on the daily stochastics that would likely help out any rally that might materialize and that may help to explain why the markets have done as well as they have. If any rally is going to take hold and produce another test of the top, this is the one. It is now difficult to make the case that we have impulsed down but still, with the overhead channel/trend line looming large at 118-05 and 50% of the entire decline at 118-12+, we should get a good feel as to what lies ahead, very soon. In fact, auction time today is not a bad guess as to when. It will take a trade below 117-13 to disrupt the potential bullish count.

10/27/09 - 9:00 a.m. - The question to ponder now is whether or not 116-28, yesterday's low, is close enough to 116-18/21 to qualify as a test of the area. For now, I suspect it isn't and that we still need to probe down to at least one more new low before we can call this a successful test of that support which, by the way, I don't think will hold. There is, however, one reason why I believe that yesterday's low may qualify as a test of my target which I will address in a moment. Keep in mind that it would be a little surprising if we didn't get a bounce off of the support since wave patterns not withstanding, that area represents good support for a variety of reasons, but I still view the longer term wave work as suggesting that we need to make another assault on the summer lows when the 10's touched 4% and therefore, I suspect that following any bounce, the support will give way to more downside. We could be looking at the initial bounce but I still imagine we will make a new low closer to that support and bounce again before giving up. That said, forecasting what is likely to happen is a tricky business and maybe I should stick with the idea that we haven't seen the real test of 116-18 before going out on a limb and deciding what will happen when we do. 

As for why yesterday's lows could prove to be a test of the support targets, the reason has to do with the duration of the decline. Between 9/16 and 9/23, a span of 6 trading days, the 10's made lows between 116-19 and 116-21 on 4 of the days while printing 23 and 24 for lows on the other 2. Additionally, we now have a wave equality target from the October highs at 116-19+ while the 50% retracement of the rally from August to October is at 116-18. Plenty of reason to look for a bounce from there. The one thing that points to yesterday's low relates to the wave equality target. Those type targets are very similar to channel targets although if the second decline is shorter in duration than was the first, then the channel line is higher than the wave equality target. The channel on my chart is drawn from a secondary high on 10/08 but even so, the decline that commenced on 10/20 was shorter still than the one from 10/08 and the channel plotted yesterday at 116-27, just a tick from the low. That said, with all of the other support levels still lower, I suspect it would take a news event to bring us out of here now. A further bounce is still possible, especially with the daily stochastics suggesting a bullish divergence is developing, but I will still work on the assumption that the lows are not yet in.  

And I can't talk about a news event without mentioning the stock market. Following the weekly key reversal plotted on Friday, the markets broke down yesterday to the lowest levels seen since early in the month. The SPX had then traded 40 points off the highs but in a choppy enough manner as to make the decline very difficult to read. Normally that would mean corrective but with the weekly reversal and the daily bearish divergences, I'm not so sure. I did notice that yesterday afternoon, when the stocks broke to new lows for the day, the 10's paid it no mind and that was surprising and disturbing if one were looking for a rally. Right now, the stocks are again breaking to new lows and we're seeing some bidding up in the treasuries so we'll just have to wait and see how far they can go. For the record and right now, this could prove important, the low of the day in the S&P futures is 1057 while a trend-line drawn off the March bottom and under the July lows, the long-term uptrend line, is at 1056.26. A break of that line could be the beginning of something more so than the end. 

For the near-term, I would look for the 10's to run into trouble near 117-19 while needing a trade above 117-24 to change the complexion of the charts for me. Even then, I'm not sure what it would mean but it would give me cause for re-examining the wave count. Today could be very telling in stocks and they can have a major impact on bonds so let's get past today to make the next call. If stocks break their trend-line, all bets could be off but until they do - and maybe even if they do - the 10's need to exceed 117-24 to show any signs of life. 

10/26/09 - 9:00 a.m. - On Friday, the first half hour produced the low for the day session in the 10's although the rally that ensued was barely cause for celebration. They managed to bounce 10 ticks which was enough to fill the opening gap but not nearly enough to prevent the lowest close since 9/23. And to add insult to injury, they broke to new lows very late in the day, seemingly setting up a test of the upper 116's this week. If good news is what your looking for, the best I can find comes from the 30-year which on Friday, held above previous lows making the case for a B-wave decline there, still intact. That count would allow for a secondary rally back towards the highs from last week before the next impulse down begins. In the overnight session last night, the futures managed to match their previous lows which is the perfect target for a B-wave although as you know, I don't care for using overnight pricing in my wave analysis. The bad news with regards to that count is that if the 10's made it down to the mid 117's in just their B-wave, then the next impulse is not likely to hold 116-18 and I continue to view that area as must-hold. I also pointed out on Friday, what I believe to be important moving averages that held the 5's, 10's and 30's, but in each case it was by the narrowest of margins. Any further downside will take out those averages and a close through them will offer a confirmation of sorts that higher rates are on the horizon. It's probably fair to say that a recovery this week is essential if there is to be any further upside beyond the highs seen earlier in the month.  

The stocks finished a roller coaster week that saw a 170 point break in the Dow on Wednesday followed by a near complete recovery on Thursday before giving it all back again on Friday. The highs in the Dow for each day last week were within 22 points of one another; just a 6 point spread in the SPX, which continued to struggle each time it approached 1,100. That sort of sideways action is typically corrective but at such elevated levels, one does have to be concerned about any psychological level that holds that well. And when the dust had settled on Friday, the equity markets had closed lower for the week after having posted new highs for the year leaving a 'key reversal' on the weekly charts. The daily charts have produced a sell signal based on daily oscillators which have built several bearish divergences while the weeklies are in position to do the same if we don't reverse up through the recent highs. And this morning, I see 2 articles worth mentioning. One notes that 90% of investors expect to see the SPX at 1,200 by 2011. Now considering that it has already rallied more than 400 points in just 7 months, projecting it up another 100 by 2011 doesn't seem so bold but rarely does a 90% majority get it right so that is a prognostication that we might want to keep in mind. Another story I read this morning starts off with the following sentence; 'The worst performance by US stocks compared with junk bonds since at least 1986 is making investors even more bullish on equities'. Not once in the article did anyone even suggest that the way those 2 markets might get back into parity would be for junk bonds to move back down. It just seems that bullish sentiment on stocks is reaching extremes. Not to beat a dead horse but a weakening stock market is the one obvious thing that could help to keep the treasury markets well bid for.

If there is a friendly development in the fixed income markets from any indicator, it would have to be the daily stochastic oscillator which continues to hover above where it was when the 10's made their 117-20+ lows on 10/16, creating a potential bullish divergence. While the wave structure continues to suggest that we are about to see a further break to the downside, a reversal accompanied by a higher low in the stochastics would likely create some excitement on the part of at least some investors which could help any rally that might develop. I'm not a big fan when it comes to relying on stochastics for signals but others are and that's why a quick turn-around in here could get some traction. If that were to happen, I would still anticipate that the rally would prove to be a B-wave and not likely to produce much in the way of highs beyond what we saw last week. 

Moving through this week, the economic calendar is pretty active and another huge round of treasury issuance is on the table so increased volatility may be in the cards for this week and of course before we finish this week, the focus will already be on next week's jobs report. Until the 30's trade below their lows from 2 weeks ago at 118-20, I cannot rule out a return to last week's highs but for now, I still believe that the 10's will test 116-18 soon and need to find support when they get there. 118-20is looks like a best case scenario for the 10's presuming that the 30's do continue to hold their 118-20 lows. A trade above 117-29 in 10's suggests that may be the correct count. On any new lows below 117-11, such a rally is not likely to materialize and I would expect to see the 116-20ish target soon thereafter.

10/23/09 - 9:00 a.m. - After trading off the highs of 10/02 in an apparent 5-wave move and then recovering a near perfect 50% of the break in both 10's and 30's earlier this week, the fixed income markets broke down yesterday with the 10's testing their previous lows of 117-21+, making the case for another impulse up nearly impossible to support. This morning, they have gapped down below those lows and appear to be on their way towards the 116-18/21 area that produced the last rally. The 30's have held up considerably better and remain above the equivalent lows but my guess would be that the longer dated issues will catch up as the 10's move closer to that all important support. Remembering that now we have a wave equality target for the 10's in the same area, this can prove to be an ABC decline which would produce another rally from that area but once taken out, it will appear that we have begun to impulse down and those long-standing targets near 4% will likely be back in play.

A letter published in the Financial Times addressing the ongoing debate about when the Fed is likely to begin to adjust rates back up has been blamed for this mornings' break and given the above mentioned curve flattening, it is likely that it is the source of some of the market action although absolutely nothing that hasn't been in the news for the past week was revealed in the letter. It just seems to be re-hashing old news but the markets seem to have had as much as they could take and broke to new lows on the news. Of course, my take is that they were just ready to do so following the impulsive looking decline and corrective looking rally of the past 2 weeks and now, we can only wait and see what will transpire from what I suspect will be lower levels seen later today or early next week. The first close below 116-18 in the 10's will be a strong suggestion that what I believe to have been a corrective rally that began in June, has ended even if the longer end of the curve needs to do some work to confirm. 

While daily stochastic oscillators are actually in position to flash a buy signal if the markets were to reverse this morning's break since they are at higher levels than they were at last week's higher low - a potential bullish divergence - I don't really anticipate such a recovery and if we continue down, those divergences will dissipate. The weeklies, on the other hand, have turned down and with a close in this area will hint at further weakness in the weeks ahead. Moving averages are a good indicator of trend and the longest one that I watch, the 233 (Fibonacci) bar is suggesting that a yield close in cash above 3.481 will break an existing sideways trend and that fits well with my notion that the 10/02 top may have been the end of a correction. Remarkably, as this report is written, the high yield in the 10's is at 3.486, a near perfect hit on that 233 bar average. At the same time, the high yield in 30's is at 4.293 while the average there is at 4.297. Those are nearly perfect hits but if perfection is what you are looking for, then look no further than the 5-year which traded to 2.442 this morning, the exact value of the 233 day average. Now consider that a 233 bar average is basically taking into account all that has happen for the past year and you can see how unusual it is to have all three maturities hit those lines on the same day. Perhaps they will help to support the markets at these lows but I would hasten to add, they had better. 

The stocks, which broke so hard late in the day on Wednesday, recovered nearly all the ground lost yesterday and continue to cause distress for anyone trying to short them. For the past 7 days, the Dow has traded on both sides of 10,000 but without yet making a clear statement about what that means. Perhaps the better level to focus on is the 1,100 SPX number. We stopped at exactly that price on Monday and managed to exceed it by just 1 point on Wednesday before reversing otherwise it has held fast however, that sort of price action is likely to prove to be corrective so for now, I suspect that both of those potentially psychological barriers will be exceeded. 

For the remainder of the day, the single most important level to look for will be the 117-22+ low from yesterday - 119-14 in 30's. Trading though those levels will fill the gaps left this morning and everyone knows that gaps are made to be filled. The important implications will be if they are not filled and we head back down to new lows. That would just add to an already bearish looking chart. Any lower close today will be negative and increase the odds that we will test the 116-18 area next week while a higher close could be an indication of a reversal, although I would need to see a lot more than just a higher close to let down my guard in here. The one positive I could point to, if it were to occur, would be for the 30's to hold above their lows from last week at 118-20. That would leave the door slightly opened for a possible secondary bounce back towards the highs from earlier in the week but I will still go with the patterns generated by the 10's and they suggest no such bounce will materialize.

10/22/09 - 9:00 a.m. - Were this market letter one that focuses on the stock market, I might have something to write about but between the time that I wrote my update yesterday and 8:30 this morning, the 10's traded in a 10-tick range and I'm hard pressed to find much new with regards to that chart. Following the 8:30 numbers this morning, they have now pushed to new lows but the jury is still out with regards to the short-term patterns. I think we are headed down below 117 whether it be from the highs of 2 days ago, or from one more rally back up through the range with trades just above 119 about as good a case as I can make. A clean break of the previous lows would disrupt that count and likely send us down to - and possible through - that all important support which ends near 116-18. 

While this isn't a letter focused on stocks, it isn't one that ignores them either and yesterday, with little warning, the Dow sold off about 135 points in the last 30 minutes of trading - 175 points from the mid-day highs that represented the best levels seen there since October 7th of last year. Coming from new highs of the move, that is a reversal by any definition although if we were to recover from it and continue up, it wouldn't be the first time that happened since the rally began in March. Still, it's difficult not to think that the break may have helped the fixed income markets remain in their recent range and perhaps it can help the break from Tuesday's highs to develop into a B-wave with one more rally to go, rather than have it turn into an impulse with a quick break of another point plus likely to occur in the next day or so. Don't get too excited though as even the B-wave theory has the same objectives; they just come a few days later. While a continued break in stocks would likely help to firm up bonds, I just can't find the count that would have treasuries rallying much from here. Not to say they can't but unless and until the 10's can get back over about 119-05 and even then, depending on what the 30's as well as the cash markets do, the patterns just keep telling me to sell. 

I see this morning that GDP was up 8.9% in quarter #3 while last month saw Industrial Production jump by 13.9%, Retail Sales post a gain of 15.5% and PPI drop by 7%. Oh, never mind, that was in China.

Not much more to add. Should we break much below 117-20, I suspect we keep right on going. Back above 118-12/16 and 119 could be back in play. 

10/21/09 - 9:00 a.m. - On Monday, it became obvious that the worst case scenario, a break into a 3rd wave decline, was not unfolding leaving one to determine whether we had bottomed in the first impulse off the top - my preferred count - or had just made a minor pullback in an ongoing rally. I believe that the bigger picture compels me to adopt the current, bearish scenario until it is proven wrong and I've continue to try and do just that; prove it wrong. The best way I know to do that is by analyzing the structure of the various swings and while the decline from the recent top has looked to be a 5-wave move, the rally was a bit trickier to read. With the trade this morning below 118-03, it becomes exceedingly difficult to make a case for an impulse to the upside so the smaller pieces to the puzzle are beginning to allign with the larger pieces. At yesterdays' highs, the 10's had recovered 52% of the decline while 30's recoverd 47% of theirs, both levels fitting well into the beaish scenario and with the break this morning, I am forced to embrace that count and continue to expect that the next break will include a test of the 116-18 target. And in fact, if you assume that yesterday was the corrective high, then the wave equality target based on the first decline becomes 116-19 - another beautiful fit. 

I've mentioned on several occasions that the daily stochastics have become oversold and now they are moving back up again. The weeklies, however, are well set up for a failure and have actually turned down but need to show weakness on Friday's close to mean anything at all. The bottom line is that the market needs to make a statement of sorts by breaking one way or the other in order to confirm anything. Another interesting set up comes from a very basic form of trend analysis; moving average analysis. While most analyst will use 100 and 200 bar averages, I like to use Fibonacci numbered averages with the longer ones being 144 and 233 days. It is most interesting to look at fixed income charts with those averages on them. It seems that the markets have been captured by the averages. Currently the longer average on the 10's is at 3.117 while the shorter of the two is at 3.487. But for a momentary 3 basis point intra-day break of the 233 bar on the day of the recent yield trough, the market has remained between the averages since late August. At last week's yield crest of 3.48, the 144 bar was at 3.50. The same picture shows up on the 5-year as well as the 30-year, which shows the best adhearance to the averages of the three. At the 4.32 yield crest last week, the average was also at 4.32, while at the 3.888 trough from 10/02, the extreme low yield since April, the 233 bar average was at  3.89. It is a remarkable picture and it seems that a break of either average could prove to be the final piece to the longer-term puzzle. 

The stock market shows no signs of stopping even if the internals appear to be weakening. The TRIN based sell signal I got last week remains intact although that could change on a close in new high territory. For now though, stocks just continue to improve. A widely watch, though very esoteric type of stock market analysis, called the Braddley Indicator, plots a path for stocks for the year well in advance. Tomorrow/Friday is one of the dates shown for a change of trend but beyond that, I see nothing any different today than what I've seen over the past several weeks or even months. Despite any bearish warning signs, stocks have failed to do the one thing that usually defines a change of trend in any market. They have failed to trade back below any significant swing low since July and arguably, since the March bottom. They have simply made higher highs and higher lows and that pretty much defines an up-trend. Now, the nearest important swing low is at 1012 SPX from October 2nd, a long way down.

From here, the fixed income markets can be headed down in the impulse that should carry us back to the mid 116's, or they can just be in a B-wave decline which doesn't change the prognosis but would delay the break by a few days. This latter scenario should see a secondary rally develop from very near the recent lows of 117-21+. At the moment, the decline looks impulsive and therefore, hints that the bigger break may be under way. It will take a trade back above 118-12 to take the heat off.

10/20/09 - 9:00 a.m. - With the help of a good PPI number, the fixed income markets are cooperating with my preferred count by rallying. Now all they have to do to keep the count going is to fail. Based on the rally so far, it is difficult to ascertain whether we are in the C-wave of an ABC which would likely produce a top today, or just the A-wave which would produce a high today, but it would also prolong the correction for several more days even if it didn't produce higher prices. Of course, I could be wrong all together and this could prove to be the 3rd wave of an impulse that will destroy the bearish count and produce new highs of the move. It's just too soon to know. It's not too soon, however, to know where we are likely to fail if we are going to fail. The best levels above us are near 118-25+ and again near 119-01+. A failure from either of those 2 areas could prove to be a top but strict adherence to wave theory does give us a little more to work with. If we fail from a high printed early this morning, the likelihood is that we are only in the A-wave off the bottom and will retest those lows in the next several days. What we should see if we are in a C-wave off the bottom - or a 3rd wave of an impulse in the one count that produces new highs - would be a high that would hold for at least an hour or so, followed by a higher high before turning down. And finally, it will take a trade under 118-05 to destroy any impulse wave count. So the quick and simple is as follows: Look to sell at either or both of the above mentioned targets while using 119-06 as a stop, or just wait for the patterns to clear up and get on board when they do so. That would at least prevent selling into an impulse wave to new highs even if it did cost you the opportunity to sell the high of a correction. One interesting tidbit I've noticed is that if we were to fail at the 118-25+, which is the 50% correction of the entire decline so far, then the wave equality target for the next low would be at 116-17+ which of course, is where I think this thing is headed. How convenient. 

10/19/09 - 9:00 a.m. - As I thought they might, the wave patterns are becoming clearer if only by virtue of the fact that we haven't broken down harder. My 2 preferred counts on Friday morning were that we were either in the latter stages of the 5th wave of the first impulse off the top, or that we were in the early stages of the 3rd wave, an especially bearish interpretation of those patterns. The fact that we remain within the range of Thursday and Friday strongly suggests that the worst case scenario is not unfolding even if we did close below trend-line drawn off the August lows. So now we are left with an obvious 'best count', one that says that we have bottomed in the first impulse off the highs, otherwise the decline is not a 5-wave move after all and therefore, the highs have not yet been seen. While I'm reluctant to embrace that latter scenario just yet, it should be noted that Elliott is very specific about what constitutes a 5-wave move but very vague with regards to corrections and thus, just about anything can qualify as a corrective move. The point being that while I cannot yet be certain that we have impulsed down, from my perspective there is risk associated with where we are and how we got here and until something tells me otherwise, I believe this to be an area where an elevated amount of caution should be exercised. Weekly oscillators are just beginning to roll over and head down and I suspect that any secondary sell-off would like see increased momentum to the downside.

Regarding stocks, following a hard break early Friday following a TRIN based sell signal on Thursday, they have recovered nicely and are threatening to invalidate that signal to some degree by trading back through it. While signals like that do imply internal weakening of the market, a move to new highs would still bring the sell signal into question and likely cost the fixed income markets some of the support that they saw on Friday. For the year, stocks are up about 20% which is a far cry from the 50% increase seen by junk bonds. Typically stocks will outperform they junk bond counterparts and thus, the amazing over-performance by the latter suggest that stocks may have a ways to go, otherwise the feeding frenzy in riskier assets may be about over. 

I also see today that foreigners increased their treasury holdings for the 4th consecutive month in August, accounting for 44% of all those issued in 2009. That compares to their having bought 27% of those issued in 2008. Part of the demand may stem from the weak dollar that enhances the yield that they are buying but whatever the case, despite numerous threats to the contrary over the past year, they do continue to buy our debt and that is a good thing. And based on the minutes of the last FOMC meeting, released on Thursday, the Fed has considered increasing the purchase of mbs securities as they feel that the risk of an economic relapse exceeds the risk of price increases. Those feeling are still at odds with what we see in several key markets, namely gold and crude oil, both of which have been inordinately strong of late with gold have traded to record levels and oil at the best levels of the year. Still, by and large the news for bonds is good and now, we'll just have to see if the patterns can improve.

As far as the 10's are concerned, if the decline off the top is to be counted as an impulse, then the best count would have that impulse finished at Friday's lows in what would have been a 5th wave wedge. That count doesn't work as well for 30's but I'll stick with it none the less. Objectives for the corrective rally include 118-14/14+, 118-21/22, 118-29+ and 119-01 and by all rights, the correction should not last much beyond this week. Structure going forward should help to zero in on a best objective and if the rally turns into an impulsive looking pattern, I may need to adjust my thinking but for now, I believe that this week will offer a good opportunity to sell into a rally before a likely test of the mid 116's - a must hold area. 

And finally, it was 22 years ago today, 10/19/1987, that will forever be called 'Black Monday' when the the stock market crashed and a day later, it bottomed and the bond market exploded. While the latter half of last year and the first quarter of this one may have been ugly for the equity markets, they didn't hold a candle to that time when the Dow lost more than 30% of its' value in just 2 days. Think about that; that would be 3,000+ points today!

10/16/09 - 9:00 a.m. - When the markets gapped down on Wednesday and made new lows of the move, they allowed for the move off the top to be counted as a 5-wave decline, thereby opening the door for an interpretation that we may have seen a significant top. While they attempted to recover on Wednesday, they weakened into the close and made new lows of the move early yesterday which forced us to reconsider just how to count the move. The most obvious way was to simply look for what we already felt was a 5th wave, to extend into a 5-wave structure of its' own, while one alternative placed us not in a 5th wave at all but rather still in the early stages of the 3rd wave off the top. That count, if correct, would call for a near collapse from current levels. The fact that we haven't already broken hard again strongly suggests that such a worse case scenario is not the correct count but hey, it's still early. For now, a trade back over 118-05 in the 10's would pretty much eliminate that count as a realistic one. Remaining, however, is the count that says we have impulsed down off the top and we will eventually see at least a secondary sell-off that will likely test that 116-18 area. Once that gives way, the larger bearish count that we have embraced for so many months will begin to look as though it is the correct road map going forward. 

While we look at all of our charts with the same mindset, trying to interpret wave structures as they unfold, it is worth mentioning a 'system based' signal that was generated yesterday on the close. This came from a mechanical system and while those are not very reliable to use as forecasting tools, this one just can't go without mention. At yesterday's close, a system we run based on TRIN, or the ARM's index, gave a sell in the stock market. That index is a measure of advancing vs. declining shares coupled with up-volume vs. down-volume. It is free from any biased interpretations by us. Signals on this system are correct only about 50% of the time with the incorrect ones typically coming during range-bound trading. It is worth noting that this sell signal follows a buy that was given on 10/01, the day before the last swing low at 1028; 60 SPX points ago. Factor the story that abounded yesterday on all the news channels regarding the Dow exceeding 10,000 for the first time in more than a year and this signal seems to take on some added importance. As we often have mentioned, this is the one factor that we believe can interrupt the bearish count for bonds so we want to keep a close eye on stocks from here. Should the S&P futures trade below 1072, things will suddenly become much more negative there. 

As far as bonds go, seemingly the best count from here excluding the above mentioned 'worst case scenario', places us in a 5th wave from the top that is likely taking the form of a 'wedge'. That would allow for one more new low that should be contained by the support near 117-11/14. The new low printed this morning may suffice although there was no new low in 30's. Below 117-11, there isn't much to prevent a test of that 116-18 area and if that gives way there won't be a bond bull around. Above 118-05, the wedge will appear to have completed and a corrective rally that could last a week or so should develop. The daily stochastics have actually dipped into oversold territory and that could help extend a rally if one can just get started. Volume and open interest are not so clear as the volume on the last 2 down days has been well above average and the open interest is pretty much flat. If the volume remains better on the down days than the up days, the markets will likely trade lower while the flat open interest suggests that for every bull liquidating a long, there is a bear initiating a short. It's seems to be a stand-off at this point. One of the first signs that we may have been in for some downside came when we breached the trend-line drawn off the August lows earlier this week. That line has moved up to 118-16 today and being Friday, a failure to close above it would create a weekly break of the trend and one more reason to suspect that treasuries are still headed lower.

Unless and until the patterns are interrupted - which we think will take a hard break in equities to achieve - they seem to be pointing us down. And now the short-term charts seem to be confirming what the long-term charts have been suggesting for months now. Should we rally back to new highs and exceed 3.05, then our 10-year count will need to be altered but until that happens, this can prove to be an area of extreme risk. The next several days should tell the tale. A corrective rally that commences from the current lows can be expected to reach between 118-16 and 119 before the next down leg commences. A trade above 119-08, or an impulsive looking rally, might allow us to take down the storm warnings but for now, we want to be sellers of any such rally. 

10/15/09 - 9:00 a.m. - The bearish pattern that set up yesterday by virtue of the markets making new lows in what appeared to be impulsive fashion has become even more negative with this morning's break. The CPI release may have helped but we had already gapped down in front of the number and now, instead of looking as though we may have bottomed in a 5-wave move, the best case scenario seems to be that we are still in the 5th wave. Simply put, that means we still have further to go. And if we are not still in the 5th, then the implications are much worse as we could be just beginning to fall off into the middle of the initial 3rd wave from the top. The latter seems unlikely, but it is not out of the question. Much of the criticism of Elliott Wave analysis comes from the fact that wave counts must be continuously adjusted to account for what is really happening in the markets since we are still tying to project future activity which is more than just challenging in any endeavor. In the current case of fixed income, while it may be necessary to adjust where we are in a wave count, the truth is that the shorter-term patterns are beginning to confirm what the longer-term patterns have been suggesting for quite some time now. This current impulsive looking decline can be interrupted and fail to materialize for sure, but given the impulsive bearish look of the markets since December and the bullish but corrective look since June, this current break down should not be taken lightly. For now, the 2 best counts that I can find are that we are either in the second to last leg of a triangle that began in June with current objectives in the low 3.70's, otherwise we are headed off to test and probably break, 4%. And even in the first of those scenarios, from the low 3.70's, a recovery rally will occur but it will not carry the markets back to where they were 2 weeks ago but rather, it will simply be a rally to sell with objectives likely to be somewhere near where we are trading now. Following that last rally in scenario number 2, it is then off to 4%. It's like the old Midas Muffler commercials that said 'pay me now or pay me later'. Unless and until the patterns change, these markets appear to be getting deeper and deeper into trouble. 

I read this morning where fixed income funds attracted 18 times more money in 2009 than did stocks; $245 billion vs. $14.5 billion. I don't know what the norm is but what strikes me about that number is that 1, not all that many investors have participated in the stock market rally and number 2, where in the world would rates be if the Fed and those funds had not been so heavily involved? 

We'll have to wait and see if the breach of 10,000 Dow attracts buyers or sellers; either is possible. If it attracts buyers, then fixed income will suffer further. I still worry that any eventual reversal in stocks can be a pattern breaker for fixed income but until something does distort the patterns, they are pointing me in just one direction and that is down.

10/14/09 - 9:00 a.m. - Since Friday, there has been no shortage of volatility in the fixed income markets and with the hard downside gaps this morning, the patterns are beginning to take shape. Following a drop of a point and 5/8ths in the 10-year from Thursday to Friday - close to 3 1/2 points in the 30's - the markets rallied hard into the afternoon yesterday but when the final bell rang, the 10's had recovered just shy of 62% of that last break while the 30's recovered just over 38% of theirs - and neither had traded above what one would have to call a potential 1st wave low from the top; 119-05 in the case of the 10-year. That meant that those rallies can be counted as 4th wave corrections and with the downside gaps this morning which produced new lows of the move just after the 8:30 news, the entire decline from the top can now be counted as a 5-wave move. That would suggest that in a best case scenario, we have seen the A-waves of an eventual ABC decline if not the 1st wave of a larger 5-wave break. The latter would suggest that the 3.10 yield trough from 10/02 could prove to be a major swing. In addition to now having what could prove to be the start of a larger impulse down, this morning's break also took out the trend-line in the 10's drawn from the August lows. We mentioned that line in Friday's report when it was just below 118 but by today, it had risen to 118-09 so it has clearly been violated. The equivalent line in cash as well as in the 30's had been broken briefly on Friday so today seems to be confirming the break of that up-trend. To truly trust a trend-line break as a sign of anything to come, one would prefer to see a close below it but for now, the fact that it has given way tells me that a trade back to the 116-18 area has become much more likely and in fact, now the burden seems to have shifted to the bulls to turn things around to avoid what looks like a down-trend in the making. 

If this does develop into something much bigger on the downside, it will prove to have been an elusive top to catch. Daily as well as weekly oscillators got overbought at the highs but neither gave sell signals which are generated when there are bearish divergences and those never materialized. Having broken below 3.25 in the 10's, most seemed to think that 3% was the next stop and yet the market turned back from 3.10 leaving many traders scratching their heads but at the same time, leaving my longer-term wave count intact by virtue of never having traded through 3.05 - at least not yet. 

I mentioned on Friday that the longer end of the yield curve had seemed to respond well to comments made by 3 Fed Governors over the course of the preceding week who suggested that the Fed may need to tighten sooner rather than later, while things had gone south following Chairman Bernanke's comments on Thursday that he thought we would see very low rates for an extended period of time. This morning an article is circulating that quotes Fed Vice Chairman Donald Kohn as saying "inflation is no threat' and we are in for a prolonged period of ultra-low interest rates" and the markets are once again under severe selling pressure. There really does seem to be a pattern here. And while the markets are repeatedly being told that inflation is no problem, the long-bond is getting crushed, the curve is steepening, gold is trading at historic highs up over $60 in a week and the dollar is getting crushed. With friends like the Fed Chairman and his Vice Chairman, the 'inflation markets' don't seem to need any enemies. 

And what would a report on the financial markets be today without a mention of 10,000 Dow. It seems that we have come to the doorstep of that once magical number and are destined to print it and see what happens then. The stocks have certainly come beyond the expectations of most analysts and the rally is pushing beyond technical barriers day after day. While the daily oscillators aren't offering much in the way of signals, the weekly stochastics are showing significant bearish divergences and those could translate to sell signals if they are not overcome by a continued strong market. The continued strong market scenario would likely do little to help the fixed income markets while a reversal from near 10,000 Dow could pay havoc with out wave patterns, but we have looked for reversals in the equities before and they never materialized so we'll just wait and see how things play out. 

As far as fixed income goes, we now have several key ingredients to digest with regards to the longer-term analysis. The markets have potentially failed at solid targets without having negated my longer-term bearish count. They have also developed what appear to be 5-wave declines but the one thing to keep in mind is that now that we have what can be interpreted as 5-wave declines, it is possible that we have witnessed a low of a minor impulse and now need to correct that wave before the decline re-commences. A trade back above 118-16+ would suggest that may be the case and if it is, then a simple correction can carry us back to the area of yesterday's highs before the next leg down. The 38% retracement would come in at 118-23+ while the 62% number is 119-05+ and that entire range must be respected as a target for a corrective rally. A close above 118-09 would suggest that the first impulse has bottomed but either way, today's action seems to be saying that there is more to come on the downside.

10/13/09 - 9:00 a.m. - The selling in the bond market that began on Thursday and accelerated Friday morning, persisted until mid-day on Friday by which time the 10's had broken all of the good support I had isolated shy of the trend-line drawn off the August low; the last area that I felt could support any reasonable rally prior to a test of the 116-18 lows from 9/22. Actually, both 10 and 30-year cash markets broke their equivalent trend-lines as did the 30-year futures, even if by only a few ticks. This morning, the line has moved up to 118-05+ in the 10's (don't forget that the markets were opened yesterday) so now any new low below the one established on Friday at 118-03+ may very well usher in a new round of selling and from my perspective, may put the extremes seen on 10/02 at 3.10 out of reach. The real key from a wave analysis perspective will be whether or not the markets can exceed the lows from 10/02 when the 10-year futures traded down to 119-05 and cash touched 3.219 as for now, that looks to be the bottom of wave-1 if this is to be counted as an impulse wave to the downside. While we traded lower on the 6th, for reasons of wave structure, those lows cannot be counted as the bottom of the first impulse but rather, must be considered to be B-waves. Any new lows now that are made prior to a trade above those levels would leave the charts with the appearance of 5-wave declines; just what a bear would want to see. A trade above 118-29 - 3.268 cash - would be suspect and might warrant a less aggressive posture on the bearish side but to me, confirmation of a 3-wave decline will come with a break of the higher levels. In futures, the 50% correction of what would be a 3rd wave comes in at 118-29 - a familiar price - so that can be considered as a prime target for this rally. The 30's have fared much worse since the lows and remain nearly a point away from their equivalent at 121-14. 

Stocks still matter and while they traded at their best levels of the year yesterday, it was on extremely low volume due to the holiday and therefore, suspicious at best. That's not to say they cannot continue higher but yesterday's highs need to be exceeded on good volume or they could prove to be a barrier of sorts going forward. There are still some cycle analysts leaning on this time frame as one that should produce a failure and we have nearly reached the top of the large price band that the Elliott Wave guru, Robert Prechter had projected for the rally to end (1,100) so things seem to be about to heat up for a number of reasons. 

Daily oscillators for fixed income are getting closer to oversold than they are to being overbought although the weeklies are still very overbought and that would make any 5-wave decline appear to be only a preliminary decline which fits well with the wave work. Neither the daily nor the weekly charts show any sort of bearish divergence at the highs so they never gave any sell signals. Daily oscillators for stocks are overbought and they too, show no bearish divergence at the highs but the same cannot be said for the weekly charts. There, a large bearish divergence exists and a break back below the lows of 10/2 would suggest a significant top has been seen but those lows are a long way off at 1015. A little above that area is the long-term trend-line coming up from the March bottom and that is one we want to remain focused on should the stocks turn down.

The only news story that got enough of my attention to include here is one that revealed that the TIPS market was up nearly 8% for the year while treasuries were down 2.8%. That is their best performance since their introduction in 1997. It was also reported that the Blackrock TIPS fund for individuals more than doubled in size from $800 billion to $1.75 trillion. The reason that I think that may prove to be important comes from a part of the vocabulary that we have become accustomed to hearing from the Fed; namely 'inflation expectations'. The Fed seems to always be focused on expectations for inflation and one has to wonder how those can be subdued when money pours into a TIPS fund the way that it has for the past year. 

The next day or so should tell us a lot. Stocks need to prove they can sustain these highs on real volume while fixed income needs to avoid the development of a 5-wave decline if they are not going to attract more sellers and at the same time, the development of a 5-wave advance would be very constructive. I'll address that one tomorrow. 

10/09/09 - 9:00 a.m. - What appeared to be a 3-wave rally when I wrote the last update, suggesting new highs might be in the cards for the fixed income, eventually produced a high in the 10's just 5 ticks from the previous high representing an 86% retracement of the decline. The 30's didn't fare quite as well but still recovered more than 75% of their initial break. Much of the strength on Wednesday came following the second best 10-year auction of the past 11, based on bid-to-cover ratio, % of indirect bids and size of the tail, and that left the appearance that there just weren't enough long-dated treasuries to go around. Yesterday's 30-year auction didn't go so well, however, as by the same measures, it was closer to the bottom of the list than to the top and with that, the 10's gave up most of the ground gained since Tuesday's lows while the 30's actually took out those same lows. This morning, the markets have broken again and this time, that 118-29/30 area that had held so well on Tuesday, has given way as I suspected it would if it was tested again. Having failed from a lower high yesterday than the one posted on Friday, a wave equality target was created at 118-23 while the 38% retracement of the rally from 116-20 came in at 118-21, which was the source of the 118-20/23 support shown on the 'Key Levels' this morning and which I used for the stop. That area held for a while but it has now been breached and I believe, will put some real pressure on the bulls. All that remains between here and another stab at the critical support near 116-18, is a 50% number at 118-08+ and more importantly, a trend-line drawn off the August lows, currently at around 117-30 and rising about 3 ½ ticks per day.

While it was the auctions that seemed to produce most of the fireworks for the past 2 days, prior to that it seemed to be more the comments coming from several Fed Governors that were grabbing the attention of traders. At least 3 of them had made suggestions of late that the Fed may have to tighten more aggressively than normal' and 'sooner rather than later' and that was causing some volatility in the markets. Yesterday, Chairman Bernanke chimed in to basically say that 'due to excess capacity and low inflation, conditions favor policy accommodations for an extended period'. The longer-dated treasuries had reacted well after the suggestions of potential tightening so perhaps the Chairman's comments had the unintended consequence of making inflation hawks more nervous. Whatever the case, we are currently trading more than a point below the highs of yesterday and breaking some important levels. 

If the volatility in treasuries wasn't bad enough for the purposes of forecasting, the volatility in stocks isn't helping either. As things stand now, they continue to look as though they have moved down from the highs of 9/23 in a corrective structure suggesting better levels lie ahead but just as the 10's had done as of yesterday, they have now recovered 86% of the initial decline, the exact retracement made by the 10's yesterday, and can now be considered to be testing those previous highs. That market remains the one that we most want to pay attention to if we are in a defensive posture as a hard break there will almost certainly serve to prop up treasuries.

For the rest of the day, I believe the break of the 118-20/23 support is critical. If we were still going to make new highs, they couldn't have come from a better target than that and now that it has been broken, the probability that the highs are in place have greatly increased. A break of the trend-line will be the next piece of the puzzle and by next week, that line will be in the lower 118's. A trade above 119-00 would take the heat off for the short-term but absent that, only 118-08+ stands as support this side of the trend-line. And going forward from here, regardless of where it comes from, the structure of any rally will be huge as that will be the final tell as to whether the decline from yesterday's highs is the end of a correction - or the beginning of a potentially much larger decline.

10/08/09 - 9:00 a.m. - The fixed income markets were strong for the first half of the day yesterday and then, with the help of a well received auction, the gains were extended right into the close. When the dust had settled, the 10-year futures had recovered 86% of the ground lost from Friday's highs which would typically be enough to all but insure that the highs will be seen again. The 3-wave structure of the decline and what appears to be a 5-wave rally, suggests the same thing but in just 3 short days, there has been so much curve shifting and basis change as to leave the 30-year futures at only 60% retracements while the cash 10's and 30's have recovered just 59 and 46% of their breaks. Collectively, those levels are not convincing although the wave structure suggests that the lagging markets will catch up. In early trades this morning, the 10's have traded into the support that held just prior to the auction at 119-12,which wave analysts would call the '4th wave of a lesser degree' and one of the prime pullback targets, with 119-07/10 being the lower end of the pull-back objectives. The early low in the 30's is right at the 38% retracement of the rally at 122-14 with 122-05/10 being the lower end of the range of targets there.  So far so good but since the lows mentioned above occurred just 15 market minutes from the highs posted at yesterday's close and following a 1 1/2 day rally, one has to wonder if we could have completed a correction so quickly. All of the evidence seems to still point us to higher highs and only a secondary sell-off that can't find support at the above mentioned targets would bring that statement into question. If we do break to new highs, then it will appear that we will be advancing in a 3rd wave from the lows on Tuesday and that would seem to point us towards a high of this push either late tomorrow or early next week. 

The appetite for treasuries seems to remain substantial as yesterday's auction came with the second best 'bid to cover' ratio for the year, the second highest % of 'indirect bids' and the second smallest 'tail'. Factor in a strong day in equities on top of the supply and it is surprising to see the buyers far overpower the sellers, yet that is what is happening and how do you fight the tape. 

I'll keep using a trade below 119-02 as a sign something is amiss while currently expecting to see at least the 10-year futures make new highs. As far as cash goes, that remains to be seen. The 10's still have barriers near 3.07, 3.05 and then 3% although that latter level would bust my longer-term wave count. The 30's are safe from that as their number to beat in order to break the bearish pattern there is still 25 bps away.

10/07/09 - 9:00 a.m. - Like the Energizer Bunny, the bond market - and for that matter the stock market as well - just doesn't seem to want to die. Regardless of the quality of the targets that turned back the fixed income markets on Friday, given the levels printed this morning on most of the fixed income charts that I use, the decline appears to be a 3-waver and that means that the highs are likely to be tested once again. The stocks had the same look after Monday's recovery so now, neither market appears to be finished. The fact also remains that from the lows on 9/09, one can see what may be a 3-wave rally needing one more new high to complete but that new high would need to be very close in proximity to Friday's high if it is not going to disrupt the bigger wave count so while it may be prudent to be a bit less aggressive on the sell side at the moment, I continue to view this area as one that carries with it great implications both with regards to the resistance this side of 3%, as well as the longer-term implications of the wave patterns. 

While the markets can certainly invalidate the longer-term wave count and the 10's will do so with a trade below 3.05 - the 30's would need a trade below 3.76 to duplicate the feat - it is still important to remain on guard since the resistance is still likely to prove substantial until the 10's can break through 3%. Additionally, some of the other technical indicators - admittedly some that I don't care so much for - can actually look worse were we to make a new high and then reverse again. Daily Stochastic and RSI oscillators - and a slew of others since they all derive their readings from the same inputs - were overbought at the highs last week but showed no real bearish divergences following the failures. Last week the Stochastic readings were in the low 90's while they are currently in the mid 70's, so a new high in the next dayor so, that isn't sustained could give a clear sell signal based on a bearish divergence. That said, the weekly oscillators look as they did last week which is to say they are becoming overbought, but with no chance of any divergences yet and therefore, they can be read as still able to allow for further advancement. 

Two weeks ago it was easy to point to the FOMC meeting as key while last week it was equally obvious that the jobs data and to a lesser degree, quarter end, could be critical. From here, however, it isn't so clear what traders are thinking. We have inflation data upcoming although that doesn't seem to be at the forefront of most investors concerns; at least not bond investors. Those who have pushed gold prices up more than $50 in the past 4 days to might not agree but for whatever reasons, the treasuries remain strong without much help from outside influence.

On the news front, yesterday Kansas City Fed President Hoenig suggested that the Fed may need to begin to raise rates "sooner rather than later" though he was quick to add 'not just yet'. Still, he becomes the 3rd Fed member in the past week, joining Warsh and Lacker, who have suggested that the Fed may be nearing a time where they will need to reverse course. That may actually be helping the long end of the curve to some degree as these suggestions are clearly aimed at the fight to fend off inflation. There also seems to be a growing concern for just how the credit markets will do when the Fed winds down its' involvement. The securiitization markets are a necessary source of credit and an article today states that private label RMBS issuance has dropped from $744 billion in 2005, to just $8 billion in the first half of this year while there have been no CMBS private deals in almost 2 years. And finally, as is so often the case, two other stories got my attention but offer conflicting evidence about the economy in general and specifically, the real estate markets.. For starters, mortgage apps. last week rose to the highest levels since May, up 16% for the week. At the same time, office vacancies have risen to 5-year highs in the 3rd quarter of 2009. The ying and the yang. 

At this point, while still wanting to be defensive, the markets are suggesting that we can still see better levels in the near term. Trades in the 10's back below 119-02 would be a concern and given that we successfully tested the 118-29/30 area on 4 occasions yesterday, there are likely to be numerous stops building there and I doubt that it will hold if tested again, so I'll use 119-02 as a meaningful area if broken. The structure of the pull-back suggests that we will test the highs again but the resistance that turned us back once already, remains and thus, we would once again be sellers on an approach to 3.05 or following any failure in excess of 8+ ticks from the previous highs. For today only, I will be a seller of any new high above the current high at 119-16+ as that would complete a 5 wave advance from yesterday.

10/06/09 - 9:00 a.m. - I'll keep this short this morning but 2 developments are worth mentioning. For starters, the fixed income markets, both 10's and 30's, tried to rally early yesterday but failed at near misses of their 50% retracement levels of the decline off of Friday's top. The 10's achieved about a 52% retrace while 30's managed a 49%. That also left both markets with near perfect flat corrections not only with regards to the fact that both produced minor double bottoms and minor double tops for the correction which is what a flat correction should do, but even the internal wave structure was correct. They closed on their lows and have opened lower this morning. The bullish count from here is that we have begun a C-wave decline that should complete today and precede another push to the top. The more bearish count would place us in a minor 3rd wave decline of the first impulse wave off the top. The first scenario would best target for a low, the area of 118-30 in the 10's which would be the wave equality target for an ABC correction and a level already tested today as the early low is 29+. Next stop should be about 24+/25+.  The equality target for the 30's is 121-16 which is a bit further away. Should we hold above either of these for the day, it would be evidence that this is a corrective decline and that the highs are not in place. Should we break them both, the odds that we have made some sort of significant top will greatly increase but even then, I will need to see one more multi-hour correction that fails to trade above 119-05 followed by a new low. Absent that pattern, which would give us 5 waves down off the top, there is just nothing to get excited about. The other type confirmation would come if we break below the uptrend line in the mid 117's. 

The second development comes from the stock market where yesterday, the SPX traded above the low of 9/25 which strongly suggests that the decline is corrective in nature and that the highs have not been seen. In early trades this morning, the futures were up more than 10 points seeming to confirm that we are not yet impulsing down. 

I mentioned yesterday that until there is some sort of confirmation, we just need to take this one day at a time and I'll state the same thing again. More than likely, by tomorrow we will have a much more definitive pattern to deal with but for now, it remains a wait and see for the fixed income markets. As far as stocks are concerned, I would lean more in the direction that they are going back to test their highs and that, if it occurs, should increase the odds of a larger break in fixed income. The 10's would be benefited by a trade above 119-04+ as that would at least fill a gap left on the opening today but there comes a point in time when you lose sight of the forest for the trees with some of these indications. Let's give the markets enough time to develop either an impulsive or corrective structure off the top and make our assessment then.

10/05/09 - 9:00 a.m. - In Friday's report, I tried to highlight the many reasons that I felt the extremes achieved just after the jobs report were great objectives from which we could expect to see a significant failure. They included Fibonacci retracement targets, wave equality targets and channel objectives. The 10's also poked their head just a few bps through their 200-day moving average before reversing. It's not as though I hadn't had other targets that ultimately didn't hold, but at no previous area had so many objectives in both 10's and 30's, come together and additionally, from the standpoint of my analysis, this one was the last objective that would still support my longer-term wave count if it held. A 10-year yield below 3.05 eliminates the possibility that it is in a 4th wave correction from the December 2008 top, my current preferred count, and therefore even risk/reward analysis makes this the ideal spot from which to think the trend can reverse in a big way. That said, until the futures are back below their major up-trend line, currently at 117-16ish, there will be nothing in the way of a confirmation that any real top is in place so we'll just have to take this one day at a time, at least until some sort of wave structure develops. It will probably be prudent, however, to work with tighter stops whenever possible and keep hedge ratios elevated, at least until something signals that we are headed back through the highs.  

The stock market, which can have a profound impact on fixed income, is in a similar situation. Maybe not so much from the standpoint of objectives as there were not so many that I saw near that 1080 SPX high with one notable exception. If one looks at a front month chart of the S&P futures, a trend-line drawn off the all-time top back in October of 2007 and again over the May 2008 high, was at 1087 on the day of the high while the futures printed 1075. That may not sound like a near-miss but consider that the low on the futures was at 654, so the rally covered 421 points making that 12 point miss a pretty close call. If you were to look at a weekly chart with the trend-line drawn on it, it's difficult to tell that it wasn't a direct hit. But just like in the bonds, until that index can break below its' up-trend, currently at about 1012, there will just no indication that a top of any significance is in place. 

As far as short-term objectives go, above 119-20 and the 10's will have recovered more than 62% of their current decline putting the highs in play. The equivalent in the 30's is at 123-06. These markets are overbought on a daily and weekly basis although some of the hourly indicators reached oversold making this the right time to make a secondary assault on the highs. If this one fails, or even if we do make new highs but fail on this side of 3.05, then we do suspect we will see another break, likely larger than the first. Beyond 3.05 doesn't mean the market is out of the woods as 3% will likely prove to be some sort of barrier itself, but from a wave analysis point of view, 3.05 is a line in the sand of sorts. And to update a pattern I mentioned on Friday, should the 10's make a new high today, it will be the 9th consecutive new high on a daily chart. That has happened just one other time since 2001, that being in January of 2008. 

Short and simple, this is what to look for. For the fixed income charts to even hint that they are done, we need to see a sharp break down in price to at least the lower 118's in the 10's, followed by a 1-day - plus or minus a few hours - corrective rally that fails to achieve 119-05+, followed by another round of new lows. That scenario gives us 5 down and possibly, the beginning of something much more meaningful. In stocks, if the SPX exceeds 1041, the odds are that the decline has been corrective and that new highs will be forthcoming and soon. Until one or the other of those 2 scenarios occurs, not much new will be apparent to me. Loving the objectives made by the treasuries on Friday the way I do, I'd be expecting to see both of the above mentioned scenarios to play out. Especially the 5 wave decline in fixed income.

10/04/09 - 9:00 a.m. - As expected, the jobs data is out and the markets have made a statement. The statement, however, was made yesterday when in defiance of all logic, stocks got clobbered and treasuries exploded. And as if the 19bps that the 10's ran yesterday just weren't enough, they ran another 6-7 this morning in front of the number which showed a far weaker jobs market than anyone expected. Well, almost anyone. Mid-day yesterday Goldman Sachs revised their outlook for NFP from -200,000 to -250,000. Previously, the most extreme of all those surveyed had projected the number to be -235. The actual number released was -263,000. This isn't really that  unusual since from March through June, on the day before the jobs report, the markets made large moves in what proved to be the correct direction giving even a casual observer reason to wonder whether or not this is truly a level playing field. Whatever kind of field it is, it is the one we are playing on so let's try and figure out what all of this means. 

In looking for reasons why we might have run so far, so fast and in front of such an important release, the first thing that comes to mind - well maybe the second - would be that it occurred on the 1st day of the last quarter. We're always reminded of how 'window dressing' can effect markets on quarter ending dates and it is possible that traders had taken profits prior to the quarter end on Wednesday only to re-enter the markets yesterday so as not to risk the data release. That makes some sense but it would seem that at some level yesterday, investors might have been discouraged by the yields they were forced to accept. We did crack that all-important 3.25 area which broke the 10's out of a multi-month trading range while at the same time, the 30's traded under 4% for the first time since April and that may have added fuel to the fire as well, especially with regards to anyone caught short. And then there was the stock market which had a terrible day and that likely attracted a bid to treasuries as well. So what do these levels mean? Let's take a look at just where we have arrived.

Having broken below 3.24, the 10-year had a wave-equality target that I have been reporting on for several weeks, even months, at 3.137. When arriving at wave equality targets, one does so using simple math but there is a similar means of coming up with a target that is not quite the same, but with the same implications. That would be to draw a channel that defines the range since the inception point. If the 2 rallies last the same number of days, then the channel line gets touched at that exact wave equality target but if the second rally last longer than the first, which is what has happened with regards to the treasuries since June, then the channel target is slightly beyond the mathematical target. In this case, the channel line was at 3.074 today and with the mathematical target at 3.137, it becomes interesting that the low yield of the day is currently 3.106 while 3.017 is the exact mid-point of those 2 numbers. The 30-year, whose channel line was at 3.897 today, produced a yield low of 3.888 so it is fair to say we have arrived at the wave equality targets and so far, they have held. As far as stocks go, a trend-line drawn off the March bottom and again under the July lows, comes in today around 1013 in the SPX while the current low of the day is 1020. Remember, we've come down from 1080 so while not yet having actually tested the line, we are approaching what could be considered to be fairly critical support. Additionally, there is Fibonacci support at about 1000 so the next 20 points or so can be very telling for the stocks but for now, the uptrend remains intact. 

Another thing of interest in here with regards to the treasuries is the fact that the 10-year futures have now posted a higher high for 8 consecutive days. That has not happened since November of last year, prior to the all-time top of the market and for what it's worth, it's only happened 3 times in more than 8 years. To be sure, this market can go higher despite the above mentioned pattern as well as being very overbought on a daily basis and getting there on a weekly basis. Remember, the trend is your friend. And if the stocks cannot mount a recover rally in here today, it will be difficult to imagine many sellers stepping up to the plate in the treasury market in front of the weekend but at the same time, given just how far and how fast we have come to what I believe are potentially great, rally ending targets, it would be difficult not to view this area as a wonderful sell area with a trade below 3.05 being the trade that tells me I am wrong. Soon the Fed will no longer be buying treasuries and if my long-term work is to prove correct, then this is the time and the place for the 10's to lose their bid. 

For the day, I believe that support should come in at 119-00/04+ and if it doesn't hold, then we have likely seen a high of some degree. What degree remains to be seen but given the targets achieved, it is my opinion that only a continued weak stock market can fend off a significant pull-back, if not an all out failure in bonds. Of course, a weak stock market is currently what we have and that has to be respected. Support there is at the above mentioned areas and since trend-lines are difficult to trade, we will use 1000 as the more critical of the levels. Absent some sort of bounce today preventing a weekly close near the lows of the move in stocks, it seems doubtful that the bonds will come off very much but a lower close in fixed income could prove important.

10/01/09 - 9:00 a.m. - With so much likely hinging on the jobs report tomorrow, I'll keep this short. We are heading into the release having now traded through the lowest yields posted since 5/21/09 at 3.26. I think that this area, extended down to 3.239, is absolutely critical to patterns and if we break through it, then only 2 'targets' will remain for the 10's before my 4th wave corrective theory is eliminated and for now, nothing about the structure tells me we are in anything other than a corrective rally. One is around 3.14 and the other near 3.06. The 3.25 area should be important enough that if it is broken, that next target should be seen very quickly and once it is touched, whichever one holds if in fact one is going to hold, the rejection should be quick as well. I would imagine that the highs will be seen by next week at the latest - if this is a 4th wave correction. While I could mention a bunch of indicators and what they might imply, it would be a waste of time as far as predictions go but still, there is one thing I have noticed that begs to be mentioned. This morning, the 10-year futures posted a higher high for the 7th consecutive day. The futures haven't done that since late in November of last year, prior to the bottom of the market. If you look at a yield chart - and I should point out that on my yield chart the low yield yesterday was not lower than the day before - but on that chart, there have only been 2 instances of 7 consecutive lower yield lows since 1/08, 3 since 8/04 and in fact, only 5 in the past 16 years. What does that mean? I have no idea but it is probably more indicative of topping action than of any sort of sustainable trend. If the jobs data is particularly soft and especially if the SPX cannot hold near 1035, I have little doubt that the trend will continue at least a little longer but this area is treacherous and should be respected as such. Good luck!