^_Tbondtrader

 

8/31/09 - 9:00 - A little bit of weakness in equities contributed to an upside gap in the 10's, pushing them back up to the highs of the move but they quickly backed off and have yet to extend the rally. The strength was in the shorter of the curve as the 30's barely traded above Friday's highs. Nothing changes with regards to the larger wave picture although wave theory doesn't accommodate double tops or double bottoms very well and given the now, near perfect double top in the 10's, the short-term pattern has me on guard for a push to a new high. If it doesn't occur quickly, then today's high could prove to be a B-wave suggesting a return to last week's lows near 3.60 before any further advancement and if that were to occur, then the mid-September timing I've mentioned prior would seem to be a likely candidate for the top of the move but I'll address that later in the week after seeing how well the markets hold on to the early gains today. 

Volume and open interest are always tricky reads during contract switches so I don't want to rely too heavily on those indicators other than to pay attention to them should we move into new high ground. If that were to occur, it would be a concern if volume did not pick up and open interest expand. Additionally, the daily stochastic that I watch is currently well below the levels it achieved from the 19th to the 21st when we posted the current highs of the move so any new highs that cannot be sustained will likely give an all out sell signal based on that indicator. It is not my intention to make it sound like all of this is pointing to a failure but rather, as the market is pushing towards new highs with a suspect wave structure, it is a good idea to know what to look for from a bullish as well as a bearish perspective.

One of the key driving forces for fixed income continues to be the equity markets and they continue to be well bid, although cracks in the armor seem to be developing. Friday saw the S&P futures make a new high of the move by just .75 and they are nearly 20 points below those highs this morning. They are still trading within the range of the past week but should they break below last week's lows at 1014.75, that could attract a much better bid to bonds. One thing I like to monitor with regards to stocks is the TRIN or ARMs index which analyzes the relationship between advancing and declining issues and their respective volume. There are many ways to look at such an indicator and one is to view an average of it in order to factor out the 'noise'. Currently, the 20-day median is at the lowest level is has been at since 2000. This seems to indicate that the rally is being driven more and more by fewer and fewer issues. For what it is worth, the last 2 times the 20-day average of price was at a new high while the 20-day median of TRIN readings were this low, were in March of 2000 and June of 2007; both very near bull market peaks. I'll keep you posted on this indicator as things develop. A story that surfaced on Friday suggesting that more than 400 banks are now failing the FDIC's grading system is making the rounds again today and that may well be what is depressing stock prices. The rally in stocks has been very much driven by the financial sector, the very sector that was hit the hardest on the way down, and one would suspect that if things deteriorate too much there, the whole market may be negatively effected but for now, we are one day off the highs of the move and only showing modest signs of weakness. I still expect to see a downside break develop and the September/October time frame has never been a friendly one for stocks, but so far, that market is best described as being range-bound - at the very worst.

For the remainder of the day, I would use a trade below 116-21+ in the December contract - now front month - as a warning sign that today's opening gap might be of the exhaustion variety and represent at the very best, a B-wave high. Should the cash markets make a clear break of the existing yield trough of the move at 3.402, I would expect to see the 3.35 gap fill area stall the rally - at least for the time being. That statement, of course, will likely be slave to the stock market as once any decline really takes hold, bonds should be well bid for.

8/26/09 - 9:00 - Following Friday's outside down reversal in the 10's, the largest such reversal since prior to the June low, all they have done is recover 70+% of the break - 90+% in the 30's - leaving my conviction that the highs of this cycle have been seen, questionable to say the least. The stocks are struggling to improve but they aren't losing much ground either and therefore, can't be held to 'blame' for the appreciation in fixed income. For now, it seems that the rally that began in June just doesn't want to die. The bigger picture that currently has me embracing one or the other of two patterns, both of which are corrective in nature and suggest a failure back towards the June lows, remains intact as the structure of the rally so far, hasn't - and won't - change. That's not to say it has to work but until proved wrong, I will remain of the opinion that a failure is in the works and only the level from which it commences seems to be at issue. 

Should the 10's continue their grind higher and exceed the highs posted on Friday, then the lone remaining gap from 7/13 at 3.35 should pose a barrier as will a trend line that is drawn off the December bottom currently at about 3.30. The lowest yield the 10's have posted since long before the June yield crest was in early July at 3.265 and that, too, represents a barrier of sorts, so the long and short of it is that unless the wave patterns are guiding me in the wrong direction altogether, this rally should not extend appreciably from here without a great deal of help from the unexpected. 

One pattern that has developed since Friday's high is that of a clear, 3-wave decline and that does tell me something. Should the 10's make new highs above the 118-14 print from Friday, then the structure of any subsequent break will need to be re-examined but absent such a move, the case for the entire correction that commenced in June being a triangle will be greatly bolstered. The reason for this is that wave theory teaches us that all 5 waves within a triangle are 3's and therefore, if we have begun a decline from the 118-14 print Friday morning and it is a 3-wave structure, it can only be the D-wave of a triangle. If that proves to be the case, then we should reverse soon and head back towards the 3.80 area - plus or minus a few bps. Should we make new highs first and then fail, any developing 5-wave structure to the decline would place 4% in the cross hairs sooner rather than later. 

Basic indicators haven't changed much over the past several days. I pointed to sharply declining open interest during since the highs on Friday and that has continued. I should mention again that much of the decline in open interest for the September contract was offset by an increase in December as traders seem to be getting in front of the contract roll that will take place on the 31st, but collectively, the 2 contracts have now lost about 70,000 contracts of open interest and that continues to suggest that the rally is largely driven by short-covering. Daily stochastic and rsi oscillators have reached overbought readings and backed away with some bearish divergences and when I add it all together - the wave structure, the open interest, the oscillators - I have no choice but to continue to look for a downside break. 

I've said on numerous occasions that I felt the main caveat to my bearish outlook for fixed income was likely to be a failure in the stock market and that remains a concern. While the stocks are holding up well and have overcome those wonderful bear market objectives that stalled the rally several weeks back, they remain overbought by almost any measure that one applies. The daily oscillators are overbought and while they can remain that way as prices continue to improve, the weekly oscillators are as well and to such a degree that they suggest that once any correction commences, it will be substantial in regards to both time and price. There seems to be no reconciling the two markets heading in the same direction in a big way and we'll just have to wait and see how things play out. 

The first indication that we are not going to extend the rally from here will be a trade below 117-22+ while a trade below 117-10+ would indicate that the 116-25 low from 2 days ago will not hold. Objectives for the current leg down - assuming one has begun - begin in the upper 114's in futures and as mentioned earlier, near 3.80 in cash. Above 118-06, and the door will be open for an attempt at new highs of the move and a likely push to close the gap at 3.35.

8/25/09 - 9:00 - For starters, I need to correct something I reported yesterday. I addressed the fact that preliminary numbers showed that the open interest in the 10's had dropped by 90,000  contracts, nearly 10% of the total, during Friday's sell-off. What I failed to notice was that a large chunk of that decline was in the September contract and was off-set by an increase in the December contract as traders apparently began contract switches ahead of the upcoming roll to December. The total of the two contracts shows that the real net change was closer to 50,000 which is a significant number itself but still not the 90,000 I had reported. Sorry for the oversight. 

The bigger error may prove to have been my feeling that we had crested in a C-wave rally that began back in early August. I'm not yet ready to cave on the near-term bearish outlook but by days end yesterday, the treasuries had regained enough of the ground lost during Friday's collapse to make one wonder whether the downside reversal on Friday may have been negated by the lesser but still significant upside reversal yesterday. If the pattern that has developed on the very short-term charts can be trusted, then yesterday told us something in either case as the decline from the highs of last week now appears to be a 3-wave structure while the rally from yesterday's low may very well prove to be a 5. What that seems to be saying is that if we do not go back and make a new high, then the bigger pattern that we are seeing unfold from the June bottom is more likely to prove to be a triangle than a flat. The reason for this is that within a triangle, all the waves should be 3's while if we are ready to impulse down towards those June lows, then the structure should be impulsive looking. The fact that the rally that developed yesterday looks to be a 5 only means that it should extend further following some hesitation so I suspect we will see the fixed income markets at least, attempt another rally but for now, I'll stick with the notion that the rally will not produce new highs. The bottom line is that for now, the triangle scenario seems to be the best bet and it would call for a swing down to perhaps the upper 115's followed by one more rally that fails to achieve the highs established last week before we begin a more serious decline. From any new high, I will have to re-evaluate the overall structure. 

Mid morning yesterday, the 10's tested their opening lows and then broke hard to the upside, rallying more than half a point in less than 30 minutes. At the exact same time, the S&P's broke off their highs and began to retreat in what was clearly a related trade. While both markets could have been reacting to the same news inputs, it seems more likely that bonds were simply reacting to stocks and that makes perfect sense. My only problem with that is that the charts tell me that bonds are headed lower - but they are suggesting the same possible path for stocks. I'm having trouble reconciling the two and I remain concerned that if stocks begin any sort of decline, bonds just are not likely to go down any appreciable amount. I know the correct thing to do is take each chart individually and that is what I will continue to do - but not without some concerns. One thing to keep in mind is that the stocks are very overbought on a weekly basis but not so much on a daily basis, which could indicate that a significant decline may be forthcoming but it may not be quite ready to commence. Momentum is obviously still up and so all we can do with regards to stocks is to wait and see if they can turn down. If they don't, I suspect bonds will deteriorate from near current levels but if the stocks do turn down and get back to where they were just last Friday when the S&P traded at 1009, the 10's could easily go back up and attack the gap that remains to be filled at 3.35 and beyond that, a 3.14 objective will come into play.  

Perhaps the most newsworthy story today is a report that President Obama will re-appoint Ben Bernanke to a second term as Chairman of the Fed. It may not come as a surprise but it does seem that the markets should feel some degree of comfort since in Bernanke, they know just what they are getting and uncertainty is never good for any market. 

For now, trades in the 10's anywhere up to 118-06 mean very little as that is the first area of any significant resistance and the structure of the rally is already clearly 3 waves. Conversely, there is little in the way of meaningful support for at least a point so until something dramatic happens one way or the other, the price swings in bonds can best be described as noise. As far as stocks go, the first sign of a problem will come with a trade in S&P futures below 1020 while the more meaningful trade will be one below 1007 as that will fill a gap left last Friday and seemingly target another 30+ points on the downside. That could prove problematic for bond bears.

8/24/09 - 9:00 - Following a spike to new highs of the move early Friday morning (during overnight trading hours) the bonds faded into Friday's opening and then got smacked down mid-morning and never recovered, eventually posting a downside reversal complete with an outside bar on daily charts. Following 9 consecutive days without ever taking out the previous days lows, stops apparently got triggered just below Thursday's lows of 117-19 and once broken, the 10's never recovered above that level. By days end, the 10-year had given up all of the gains achieved during the week and closed just below the weekly opening as well as the previous week's close. In fact, the weekly close was very close to the opening leaving those charts with what would be described as a 'doji' by candlestick chartist. Objectives for an end to this recent rally were always very solid in the 118's as well as the low 3.40's in cash while weekly timing was good for last week, extending to today on an extreme and given that the high last week was 118-18+ in futures and 3.426 in cash and we are now trading back in the 116's (3.60's cash), I am of the opinion that the high of what I have suspected was a C-wave all along, is now in place. Whether it be the C-wave of a triangle implying a further narrowing of the range over the course of the next several weeks, or the C-wave of a flat suggesting the correction off the June bottom has ended, I do not expect to see those highs exceeded, presuming that my preferred wave counts calling for another test of 4%, are correct. Much may depend on the stock markets ability to hang on to the gains achieved of late but until something tells me otherwise, I will be in a defensive mindset with regards to treasuries. 

I mentioned above that the break of Thursday's lows seemed to touch off sell-stops as it was the first time in nearly 2 weeks that a previous days low was violated and nothing seems to reflect that better than open interest. On Friday, it dropped by 90,000 contracts in the 10's, nearly 10% of the total and while declining O.I. in a down market is what a bull should want to see, that big of a purge in one day makes one wonder if this doesn't reflect a bigger change of sentiment. In addition, daily stochastics have now turned down with a negative divergence and the RSI has broken away from its' highest reading since 7/10. Everything points to the fact that we have crested in something - and now I am left to determine if either of my 2 longer-term and preferred wave counts are correct. Any extension of the rally from here would suggest a move to at least 3.14, with nearer to 3% not out of the question. 

As I write this report, the stock market continues to push higher, having now broken above Fibonacci retracement targets for the entire bear market. There remain plenty of targets nearby and I still expect to see a significant pull-back but until stocks run into resistance, bonds aren't likely to attract much attention. The SPX has already rallied more than 25 points just since Friday morning and much of those gains are being credited to remarks coming from Chairman Bernanke and European Central Bank President Trichet suggesting that the economy is on track to continue to pull itself out of the gigantic hole it was in. At the same time, this morning we see that Nouriel Roubini, credited with having predicted the credit crisis, now says he sees increased risks of a double-dip recession. Certainly if that prognostication gains traction, stocks will give up ground - perhaps a lot - and bonds will once again gain favor. If we are reading the wave patterns correctly, however, that is not likely to occur until we can see the 10's closer to and probably through, 4%. And for now, mid to late September looks like the first likely time frame for that low. 

In the triangle scenario I am monitoring, targets for this leg are best in the upper 115's in 10-year futures and just above 3.80 cash. We could easily see a move back towards the upper 117's first as we appear to have be near the end of a 5-wave decline, but not near the bottom of this move. Defense if the key word for now.

8/21/09 - 9:00 - Yesterday's action in fixed income was uneventful to say the least. The 10's managed to make it through their 9th consecutive day without violating the previous days lows and finished with an inside day and slightly higher close. An overnight bid produced the highest prices seen since the rally highs established on 7/13 but that faded quickly and fixed income opened lower across the board, likely in response to a well bid stock market that is threatening to produce new highs of the move. Stocks had been down overnight but reversed at exactly the same time that the bonds made their highs. Coming into this week, I was concerned about a reversal in fixed income based on timing derived from weekly charts as this was the 10th week since the June swing lows, exactly twice the number of weeks in the February through March correction. For the record, should we firm back up and produce new highs on Monday, we would then have rallied for exactly twice as many days off the June bottom as we did off the February bottom. However one looks at it, timing is ripe for a reversal in here if we are correcting prior to another down leg and that is still what I believe this to be. The 'break levels' I gave yesterday at 117-00, 116-18 and 115-13 still apply but with 1 higher number now carrying some significance. A trade at 117-18+ today would break the aforementioned pattern of 9 consecutive days with higher lows and that could serve to set off some sell stops but it would still take some follow-through to turn the tide. As far as the upside goes, nothing has changed. We have entered into a zone that includes numerous targets for this wave to end if we are indeed correcting up with the lower 3.40's always having been one of the preferred targets for 10's. Should we recapture a bid between now and Monday that pushes us up to new highs, the remaining gap in the 10-year at 3.35 should put an end to the rally, otherwise the 3.13/14 area will seem probable and if we cannot reverse by the first of next week, then mid to late September would become a good timing target for the highs although right now, that time frame could still produce the bottom of the entire impulse that began last December. It's just too soon to know. 

As far as equities go, one has to wonder if the rally there will ever end. Having already reached historic proportions with regards to the % increase vs. the time it took to develop, the rally now appears as though it will exceed the Fibonacci targets that smacked it back several times down during the past week. Today is an option expiration day and those have a habit of distorting price swings so we'll have to wait and see what it brings but S&P futures are already knocking on the door of the highs posted back on the 7th and as mentioned yesterday, markets tend to seek out 'paper' and right now, the buy stops above the highs are the most likely source of that paper. 

One thing that stocks and bonds seem to have in common in here is that neither is yet showing any signs that they will not make further new highs. In the bigger picture, those 2 markets continue to move counter to one another but right now, neither appears to have impulsed down from the current highs of the move and it seems that if there is one pattern that will not persist, it is that both stocks and bonds will not likely continue to move in the same direction. I have recently voiced the opinion that what appeared to me to be a vulnerable stock market was the one thing that caused me to think that the negative outlook for bonds might be ill-conceived. The last thing I would have imagined would transpire would be a strong stock market accompanied by a strong bond market. While that may be what has happened for much of this week, I continue to doubt that it will persist. 

Being a Friday and in the middle of some timing inflection points as well as price targets, I would use 117-18 as a stop on any longs would look to sell into any spike through the recent highs that tests the gap in the 10's at 3.35.

8/20/09 - 9:00 - Following an explosive opening yesterday in fixed income in reaction to a weak stock market, the early highs in bonds and early lows in stocks held for the day resulting in higher closes in both markets and no real resolution to the short-term patterns - not just yet. The 10's did close below the first of my 'levels of concern' at 117-31+, however it was by just a plus and more importantly, the close was well above the low of the day which was another of my concerns, leaving things about where they were after Tuesday's close. While momentum seems to be fading in the treasury markets, the 10's still posted their 7th higher high and higher close, in the past 8 days and it doesn't take a technician to see that as a friendly pattern. As far as I am concerned, there remain 3 likely resolutions to the current pattern; one, a triangle preceding a decline; two, a flat correction preceding a decline; or three, my wave analysis is incorrect and there will be no decline. It won't take much more on the upside to eliminate the triangle scenario but until it gets eliminated, wave theory suggest to me that it may very well be the most likely count so what happens from right in here is very important. 

The fact that since the June lows we have seen a rally, a pull-back and now a second rally, each leg seemingly a 3-wave move and none having taken out the June low or the early July high, gives the entire move the appearance of a contracting triangle. While the target for the C-wave in such a pattern is not cut in stone, the C-wave cannot be equal to the A-wave otherwise it would take out the A-wave high and invalidate the triangle pattern. With that in mind as well as the tendency for alternating waves in a correction to be related to one another by a Fibonacci ratio, the last likely target based on that tendency would be where the C-wave equaled 62% of the A-wave. At yesterday's highs, the 10's printed 118-14+ while the 62% target was at 118-15+ and at the same time, the 30's printed 120-24+ while the target there was 120-25. The cash 10's exceeded their target by 3 bps while the 30's missed by just 1. All told, these highs represent great targets from which we could reverse if the triangle is the correct call so we may very well be close to determining whether or not a triangle is still a working pattern or whether it can be eliminated, leaving us with only 2 potential counts. 

The other interesting thing about yesterday's highs was that they eliminated gaps in the futures markets, but not in cash as the 10's never quite got to their last gap while the 30's traded into theirs but couldn't fill it. That would leave me to believe that if we can fill those remaining gaps on a closing basis, which would require a close in the 10's better than 3.35 and in the 30's better than 4.239, we are probably not in triangles and the eventual high of this move could be reasonably further away. I like the area of 3.13/3.14 in the 10's for my next target. 

Stocks continue to show more weakness than they have any time recently but at the same time, they continue to fight their way back from poor openings and for now, look as though the highs are not in, based on wave patterns. That can change but until it does, I'm thinking that those wonderful 38% retracement targets that stopped the Dow and SPX, may just be too good to work. Stops will certainly pile up above them and markets seem to move towards orders which in this case could prove to be buy orders above the highs. 

This morning I see that a poll taken of 200 institutions globally shows both investor optimism and stock market bullish sentiment, to be at 2-year highs. It also reveals that 75% of fund managers expect the economy to strengthen in the next 12 months while the proportion of money allocated to bonds is the lowest since 4/07. I'm not sure this tells us much but the contrarian in me says be careful of stocks and being short bonds. We'll find out just how good - or bad - these institutional investors really are. My problem with the results of the poll is that I disagree with the consensus on stocks but for now, not so much on bonds so I'll just have to see how well things play out for them - and for me.

From here, a trade below 117-00 would suggest that we may have seen the top of the C-wave while a trade below 116-18 would all but confirm it. A trade below 115-13 would suggest that the entire pattern may not be a triangle at all and that we may have seen the end of the entire correction and be on our way to 4%. For now, that would seem likely only if the stocks head down from here and right now, that just doesn't appear to be happening.

8/19/09 - 9:00 - In somewhat of a replay of Monday, stocks have been hit hard overnight and bonds have been the beneficiary, producing upside gaps. On Monday, even though the Treasuries remained bid all day long, the gains were not all that impressive and while the close for the 10-year was higher, it was still within the range established on Friday even though stocks closed at the worst levels they had seen all month. This morning, however, while equities are very soft, they are currently trading above the lows established on Monday while the Treasuries are on fire, trading well above the best levels seen on Monday and in fact, above the best levels they have seen since the day after the July high. There is the feeling of some sentiment change in here with more investors seemingly seeking out the safety of the Treasury market as they wait to see if stocks can hold, on this second test of support near 880 SPX. I still view the stocks as very vulnerable in here and think the best course of action in fixed income will be to try and follow the rally with tighter stops as I still believe it will produce a very significant failure but to do so, the stocks will likely need to find some support.

Yesterday, I mentioned how well the 30-year futures had reacted to the gap left on 7/13, having first failed at the bottom of the gap on Friday and then on the explosive move up on Monday, failing right up against the top of the gap. This morning they have blown through that gap and at the same time, the 10-year futures overcame their equivalent by gapping above it. Both the cash 10's and 30's have, so far, failed to erase theirs and those gaps, at 3.396/3.350 in the 10's and 4.273/239 in 30's, should be respected for their ability to turn this thing around, otherwise the 10's could be headed to near 3.14 as they complete a larger, flat correction. One thing all of the fixed income markets have done is trade high enough to satisfy any projections for the C-wave of a triangle so the next several days - perhaps less - may very well determine whether or not a triangle remains one of my preferred wave counts. Should the fixed income markets fail to retain their gains today for any reason - although the only one that makes pence would be a complete reversal in stocks - then this could very well prove to be the top of this leg of the rally at the very least. Trading bonds in here is all about stocks. 

Technically, and by that I don't include wave analysis, bonds look very strong and not ready for a reversal. They have cleanly taken out resistance produced by gaps, trend lines, Gann angles and moving averages. Daily oscillators continue to climb into overbought territory but without any signs of divergence to price and while the Stochastic is showing readings on the upside last seen in late June, back then they remained overbought until mid-July after the rally had been extended by several points. The only traditional technical warning sign that I am seeing is coming from volume and there, while it isn't terrible, the volume has been deteriorating since last Thursday while prices keep advancing. That seems to support the wave analysis that says this rally will not persist but still, for now it's all about stocks. 

And that brings me to the stock markets. For now, I am not willing to say we have seen a top even if the levels achieved at the highs were perfect targets for a bear market rally to end. Rather, I will look for signs that we are doing something more than just correcting the last leg up that commenced on 7/08. If that is what this is, then support should show itself in the Dow in the 8900's and in the SPX near the 960. If we develop an obviously corrective pattern on the way to those levels - and they are the upper objectives - then there may still be more upside in stocks and that would certainly bode well for the more negative outlook in bonds. A failure to hold those supports, or a clear impulsive looking decline beyond this week, and we may well be looking at the one thing that could save the fixed income markets from finishing off what for now, clearly looks like an impulse wave up in yield from the December extreme, needing a trade very near 4% to complete. 

For today, a close in the 10's below 117-31+, would be a warning sign although unless we close lower for the day, meaning below 117-16, it would not really qualify as any sort of reversal. That said and given my wave analysis, I wouldn't want to see any close within just a few ticks of the low of the day, regardless of where that low was. On any further new highs, I would be a seller in the aforementioned gaps.

8/18/09 - 9:00 - Following the openings yesterday which saw bonds firm in reaction to extremely weak equity markets, the rest of the day was uneventful. The treasuries retained a bid all day long although is was less than impressive as the 10's spent most of the day within Friday's range. Stocks on the other hand, couldn't get out of their own way following a significant downside gap on the opening and they remained in a tight range for the entire session; lower than they had been at any time since the end of July. Based on current chart patterns, bonds are showing no signs that they are done going up, while the stocks are flashing warnings that yesterday may have been just the beginning of something much more than just your normal pull-back. 

As far as the fixed income markets go, we seem to be in the second impulse up from the lows of 8/07 and until it ends, there is just no way to read whether the pattern will unfold into a 5-wave move, or remain just a 3. The decline from the highs of yesterday, however, clearly looks to be corrective and thus, I have to believe we have not yet seen the final highs of this push, although they could be close at hand. At the best levels of the day yesterday, the 30's traded to 119-31+ while there remained a gap left from 7/13 that got filled with a trade just a tick higher at 120-00+. If you look back at Friday's action, the 30's posted a high tick at 119-14+, which was the exact beginning of that same gap, once again showing just how important these gaps are to at least some traders. On any further new highs, the equivalent gap in cash 30's runs from 4.273 to 4.239 while the 10's will be dealing with the same gap at 118-04/09 in futures and at 3.454/451 in cash. Given the degree to which all of these markets seem to react to gaps, these should all be considered to be significant resistance/targets and approaches to any of them must be respected as potential wave-ending moves. I still believe that this rally is a C-wave but can't determine if it is finishing off the entire correction which began in March, or whether there remain 2 more protracted swings before we head back down towards the June bottom. For this reason, I will not ignore any approach to any reasonably good resistance area. 

As far as stocks go, not only did yesterday's break come from incredibly good targets hit on the upside and in a time frame that fits with cycle work for a potential top to this rally, but yesterday saw the lowest reading on the advance/decline ratio for all U.S. stocks seen since March 5th - prior to the bottom and as I have pointed to prior, the overall volume during the entire rally has steadily deteriorated and that, too, is reason for concern. This is a market that will demand the attention of anyone trying to navigate through the fixed income markets.

On the non-technical front, Abby Joseph Cohen of Goldman Sachs, said in an interview yesterday that "the recession is ending right now" and reiterated what had come from GS last week by suggesting we could see 3% growth for the remainder of this year but more like 1.5 to 2% next year. Also in the news is Alan Greenspan who seems to agree that the growth rate for the rest of this year will be good but not so good next year, however, he went so far as to say that 'the recovery had no legs'. This morning we got PPI data which showed significantly lower prices at the producer level than were anticipated as well as a Housing Start number that was worse than anticipated and yet, the fixed income markets remain pretty much where they spent all day yesterday; one more indication that they may be losing momentum.

From here, watch for new highs in fixed income to be met by sellers at any of my intermediate resistance levels and especially in the aforementioned gaps. If we are tracing out a triangle, then the end to this rally will likely come within about 10 bps of where we are right now in the 10's, while if we are finishing off a flat, the ultimate high could be as far away as 3.14. In any case, nothing yet suggests that we are doing anything other than correcting up and until something does, I am in the mode of looking for a top. And again, stocks are the one thing that can cause an unexpected spike in bonds and for now, they appear to be headed lower so don't ignore what is happening there. I'll try to post some objective for stocks by tomorrow.

8/17/09 - 9:00 - This week figured to be a potentially critical week from the perspective of timing - assuming that either of my 2 preferred wave counts is correct - since it is where this presumed 4th wave of he impulse that would have begun in December, would be equal to twice the duration of the second wave as measured in weeks - a fairly typical pattern - and we have gotten off to an interesting start. Overnight, stocks finally attracted some real sellers and the treasuries predictably firmed up as a result, although at least in the case of the treasuries, the markets seem to be struggling to retain the overnight moves. While both stocks and bonds have already traded to levels not seen this month - highs in the case of bonds and lows in the case of stocks - the overnight move is more dramatic in the stocks as they were up against their best levels of the entire recovery rally as recently as Friday. That market has flashed ample warning signs of late that it may be making a top but this is the first time we have seen such a dramatic change of sentiment on such short notice and how the rest of the day goes could be critical. A weakening stock market - something I am anticipating - has always seemed like the 'fly in the ointment' with regards to my negative outlook for treasuries and we may be about to find out if the two counts are compatible. For now, I am still expecting the see the bonds turn down this week and the low 3.40's has been a preferred target for my triangle count, although in the scenario whereby we are finishing off the C-wave of a flat correction, if we do not hold the low 3.40's, a projection can be made down to 3.14ish. As far as the S&P futures go, if they cannot hold near 980, then 960 could come rather quickly and that will be the first of several critical support areas, one of which will need to hold, otherwise we may be in for a long summer with regards to the equity markets. Keep in mind that stocks have been remarkably resilient since the March bottom and this topping process that I believe them to be in can take some time to complete. A close near the low of the day regardless of where that low is, will be the first suggestion that something bigger than your normal pull-back may be developing. Let's not lose sight of the fact that both the Dow and the SPX have posted highs of the move that are nearly perfect 38% retracements of the entire bear markets and those must be respected until it becomes clear that they are not going to hold. 

A development I first noticed weeks ago continues to confound me and that is the pattern of open interest in the fixed income futures. The 10's continue to lose open interest as that market rallies and that suggest that the rally will not survive but at the same time, the 30-year futures have seen their open interest increase steadily since the August lows just like it did during the rally phases in July. It is impossible to know which of those two markets is the one to trust so I'll just keep monitoring them as we progress though this time frame and keep you posted. Daily stochastics, meanwhile, are beginning to reach into overbought territory and thus, if we were to reverse from any new highs later in the week, a nice sell signal could develop there. Bottom line in here is that we are reaching into objectives for the 10's and there continues to be evidence that my C-wave count is valid, although I do want to see a reversal at some point soon and the one thing that could prevent that from developing, would be a continued weakening stock market. A lower close today in bonds would be a concern but absent that, I would still expect to see better levels than what we have seen so far. Objectives are best at 3.45 and again 3.42 before we should test a gap in the mid to upper 3.30's.

8/14/09 - 9:00 - Bonds continue to push higher and closer to what should be a meaningful high and possible top. As mentioned yesterday, best timing for this presumed C-wave rally to terminate is sometime next week, otherwise possibly not until the latter half of next month. For weeks now, I have looked at the charts for clues as to whether we are in a simple ABC 'flat' correction, or a triangle which would count out as ABCDE. Given the 3-wave appearance of the the rally out of June as well as the decline from early July, those appear to be the two best alternatives and the best 'heads-up' as to which of the aforementioned corrective patterns is the most likely, will come from the structure of the rally we are currently in. If we are about to complete the C-wave of a 'flat', the rally should take the form of a 5-wave advance and once completed, we should be headed back to the 4% area. If we are in a triangle, then this current rally will be 3-waves and will be followed by 2 more price swings that continue to narrow the range that began from the June bottom. The 'flat' could very well end by next week somewhere near 3.40 while the triangle would likely continue to develop for several more weeks and perhaps for a month or more, although the best levels we will see will be posted during this current leg, so the point is, in the very near future and possibly next week, we could see the best levels we are going to see before the 10's head back towards - and perhaps through - 4%. Currently, the rally counts well as a 3-wave move and in order to make it appear to be a 5, we would need to see a correction develop lasting 1-3 days where the low remains above 116-08, before we make another round of new highs so there is every possibility that we can get some resolution to these patterns by next week. The most important difference in the 2 is how fast we may come away from the next swing high so I do want to try and make a judgment as soon as possible.

Given that my 2 preferred wave counts produce very similar end results, the main objective now should be to try and recognize signs that suggest neither count is correct and that we are simply headed much higher. That, too, should be determined very soon since during the course of this week, the 10's have moved cleanly through multiple moving averages as well as significant trend lines and they are coming out of a pattern since the July highs that can best be described as a 'flag' or channel. These are all potentially friendly developments and if there is ever going to be a time when the bulls can wrestle control of these markets away from the bears, it should be now. And while on the subject of these traditional indicators, volume and open interest analysis continues to be confusing in that the 10-year is showing no increase in open interest as we rally which should be disturbing to the bulls, although the 30-year is. Both reflect reasonably good volume. Finally, the daily stochastic, which helped spot the bottom, has room to move up but is approaching overbought status. It can remain overbought as the markets move higher but any failure in the near future from an overbought stochastic will need to be respected, especially if it comes with bearish divergences. I'll keep on top of them for sure. Major supply concerns should also have ended with the auction yesterday so now, we'll just have to wait and see how far this thing can go.

For now, and probably on into at least mid-week next week, the markets look to be healthy. Trades back under 116-08 will suggest that this leg of the rally may be over but remember, unless this rally can develop into a 5-wave move, which it currently is not, then the next pull-back should be just that, a pull-back and not the beginning of a new down-trend.

8/13/09 - 9:00 - In the first minute that followed the FOMC news release yesterday, somebody paid 116-15 for the 10-year while somebody else - hopefully - sold it at 115-13+. Other than possibly program trades being to blame, it's difficult to understand how opinions of the implications of what was in the statement could be so different. As pointed out in yesterdays update, there was more than enough 'bad news' for bonds being bantered about; much in the form of surveys that showed more and more investors at home and abroad are falling into the camp that believe the recession is all but over and yet, the markets were very firm early yesterday. They softened somewhat at auction time but the real fireworks came when the Fed released their statement following the end of the FOMC meeting. The treasuries first spiked up and then collapsed more than a point, all within seconds of the release and when the dust had settled, everything was pretty much where it had been before the news - everything except the equity in the accounts of those who tried to trade the news. Following some overnight weakness, the 10's have reversed and are now making new highs of the move above significant resistance in the upper 116's. There is just no indication that the rally is ending. 

Early this morning, the Libor-OIS spread, one which reflects banks willingness to loan to one another, narrowed to it's lowest level in 16 months, further supporting the growing belief that we are moving away from the abyss. That seemed to have been the explanation for the early weakness in treasuries as well as enough buying in equities to push the S&P emini's to new highs of the move. Then came another dose of reality in the form of a significantly softer than expected Retail Sales number and up went bonds while stocks headed back into yesterday's range. At the highs yesterday, the 10's were right up against a trend line drawn off the July top and while it held on that approach, it has been breached this morning. The line is around 116-14/15 and if we can manage to close through it, we should be on track to move on up towards the 118's in futures and the low 3.40's in cash in the immediate future. 

One thing that has disturbed me about this rally from the standpoint of it being the 4th wave of a large impulse up in yields that began in December, is the fact that the second wave lasted 5 weeks and we are already in the 9th week of this presumed correction. While nothing says the 2 corrections need to be of equal time, wave theory does suggest that if they are not, then they should be related to one another by some Fibonacci ratio and to that, I would include using 200% to the otherwise 1.382 and 1.618 multipliers. That would point to next week being a potential swing high in price so I don't want to let down my guard, but I still suspect that the markets are headed higher and the truth is that a lot can happen between now and next Friday.

Besides all the subtleties in the FOMC statement, the one thing that seemed to stand out was their announcement that their Treasury purchase program would be extended from September to October for an end date but without any increase in the dollars allotted for the program. In other words, they will be stepping up for fewer bonds each time they come into the market. That, like most of the other news of late, should be negative for prices and yet, the treasuries continue to grind higher. Today at 1:00, the 30-year auction will go off and almost certainly contribute some volatility to the markets and then, for the first time in a while, supply won't be one of the central thoughts on the minds of traders and hopefully, that will help to keep us above the resistance on a closing basis and on to our targets above.  

From the standpoint of the bigger picture, the treasuries moved up nicely from the June bottom even if not impulsively, and then traded down in a beautiful channel. Both the rally and the subsequent pullback lasted the same number of days and the break above yesterday's highs as well as the aforementioned trend line should serve to extend prices beyond today. If the rally doesn't end next week, mid September seems like the next best bet and if we don't reverse from the low 3.40's, then 3.25 and even 3.13/3.14 become realistic objectives. Only a trade below 115-08 would suggest some sort of high is in place and unless I see that trade, I will expect to see the 10's run another point at the very least and probably more like a point and a half.

8/12/09 - 9:00 - Coming into this week I was expecting to see a rally develop but at the same time, it seemed logical that the supply would pressure the markets and that we would need to at least get through today's 10-year auction before expecting much on the upside. Defying the odds, the rally got an early start and now, it seems like the job of the auction as well as the FOMC meeting to follow will be to sustain the rally, not to create it. 

The lows established in the middle of a gap on Friday held and Monday saw the 10's move a point above them with nearly another point added by the time we had opened this morning. A trend-line in the neighborhood of 116-18, looked to be the critical area to overcome to confirm a low of what I feel has been a B-wave decline and having already tested that line overnight, it now seems as if we need to only get past the auctions without a failure to be able to project the markets higher still - a projection I already think can be made. The 118 area in futures appears very realistic in my 'less friendly' triangle count with 119 and possibly into the 120's the better target if we are in a 'flat correction'. The cash markets equivalents are in the 3.40's and again near 3.25 and even if the markets don't care for the news they receive today and through the remainder of the week, it still appears that the decline is over - for now. Nothing I've seen, however, makes me think that a move back to 4% will not be forthcoming and likely by later in the summer or shortly thereafter. 

In addition to having to get past the auction and the FOMC news today, I woke up to read several articles that make the rally that we are seeing all the more unlikely. For starters, a poll of 47 economists shows that 27 think that the recession is over while 11 of the disbelievers think it will end this month or next. A different survey taken of 2300 Bloomberg users across the globe shows more optimism than pessimism for the first time in several years and went on to show that expectations are for yields on 10-year treasuries to increase - and that was taken before the recent and surprisingly good reports on GDP and jobs. And if all that weren't enough, it is also being reported that the Fed is expected to allow their treasury buying program to lapse. So here we are, waking up to a day that will see $23 billion new 10's come to market, important and potentially not so good news coming from the Fed and several surveys that show a majority of economist as well as Bloomberg users thinking that the economy is improving and yields are headed up and yet - yields are headed down. Go figure.

Stocks weakened yesterday from wonderful bear market targets achieved on Monday and further weakness overnight certainly contributed to some of the bid for treasuries but at the same time, they have recovered nicely from their worst levels seen late last night and are currently trading near unchanged on the day. They may well be focused on the FOMC meeting but in truth, they seem to just have run into some serious resistance that may require them to take a breather before they can make a more serious attempt to overcome it. The next week or 2 could be critical to the long-term well being of the stock market and it will be a good idea to keep a keen eye on it. Another interesting tidbit comes from the NYSE which has reported that 'short interest', the number of open short positions in stocks traded on that exchange, dropped 10% in the last 2 weeks of July and that could prove to be a good contrary indicator.

It now appears that following a 20 trading-day rally out of the June bottom, followed by a 20 trading-day decline, the markets have found a low that I continue to believe is a B-wave low within a corrective rally that once completed, will give way to a move back to, and probably through, 4%. Late September offers up some good timing although it is not yet clear whether that is more likely to be the end of the correction - or the end of the move through 4%. The ultimate structure of the rally that we are currently in, will be our best indicator of that and it is just too soon to get a clear read on it. I continue to view the resistance in upper 116's in 10-year futures as well as the 3.63 area in cash as very solid and if the stocks don't return to their lows from last night, I suspect those areas will hold into at least the 1:00 auction time. Given the extent of the rally so far, I think it a good idea to flatten up in front of that news as well as the news to follow at 2:00. 

8/11/09 - 9:00 - Since the July highs, highs which appeared to represent the top of an A-wave rally based on the internal structure of the rally, the 10-year has come down in a near perfect channel with 3 distinct downward legs separated by 2 sharp rallies and now it appears we may have begun the third such rally. Should they manage to break above the upper end of the channel, which is currently in the neighborhood of 116-24, dropping by about 3 ticks per day, a strong case could be made for the end of what I believe to be a B-wave. That would suggest an extension of the rally to somewhere near 118 in the futures and 3.50 in cash in one scenario, while 119 and 3.25ish remain as possible targets in another. Much more than that before we turn down with objectives through the June lows seems unlikely for now as everything still seems to point to this rally, which commenced in June, as being a correction in a bear market. 

While a bullish divergence on the daily stochastics for the 10-year that seemed to be developing a week ago has been negated with the oscillator having made new lows along with prices earlier in the week, it has still turned up from oversold territory and alone seems to be pointing us to higher prices. Other technical indicators are looking positive for a rally as well and all lumped together, I am forced to believe that we have seen the low of the B-wave and have entered a rally which should produce the best selling opportunity left in this market before we head back through 4%. There is some solid timing for mid-September but for now, it is difficult to determine if it is more likely to be the high of this rally, or the end of the move through 4%. That question should be answered by wave structure of this rally. A 5-wave advance to somewhere near 118 could be the end of the move, however, should the rally take on the appearance of a 3-wave move, that would strongly suggest that a triangle is the best count and that could persist for several more weeks. We just need to take this rally one day at a time but with the potential significance of the news that lies just ahead beginning with the 10-year auction tomorrow followed shortly thereafter by news from the FOMC meeting and then inflation news the end of this week and beginning of next, a good read on the patterns should unfold very soon. 

For now, the most important resistance we will need to deal with will be in the upper 116's while the only meaningful support is just below 115-16. And while on the subject of support, should the SPX break below 990, a high of some degree may very will be in with regards to stocks. That could certainly serve to help out the treasury markets going forward.

8/10/09 - 9:00 - Following the point and 1/4 collapse in the 10's that accompanied the jobs report Friday morning, the markets stabelized and traded sideways for the remainder of the day and while they have attracted a mild bid this morning, it seems apparent that the upcoming auctions along with Wednesday's FOMC meeting are foremost in neary everyone's mind. These auctions could be revealing from 2 perspectives; first they may tell us if the poorly subscribed auctions of short-dated issues 2-weeks ago were a pre-cursor to what could be even sloppier ones this week, or they could prove that the foreign Central Banks avoided spending their money on the short end of the curve thinking it would be better spent on longer-dated issues. That seems unlikely, especially given the better than expected jobs data but still, auction results are always difficult to predict and given that only an hour after the 10's go off on Wednesday, the markets will need to digest news of the FOMC meeting, expecting much in the way of a recovery before then may not be a good idea. And following what could prove to be a critical day on Wednesday, we then have to deal with Thursday's 30-year as well as a pick-up in what has been a quiet economic calendar of late, as Thursday and Friday things start to heat up with Retail Sales, Inventories and CPI as highlighters. 

A survey released this morning does bring hope to the longer end of the curve from the perspective of the majority of Primary Dealers as it shows that 8 of 14 of them (2 didn't repsond to the question) are satisfied with the Fed's proposed exit strategy laid out by Chairman Bernanke before Congress and in the WSJ 2 weeks ago. 4 of the 14 were 'very confident' while only 2 were 'not very confident'. That should help to calm the fears of at least some of the inflation hawks that obviously still exist, however, 15 of the 16 Primary dealers expect to see positive growth in the final quarter of 2009 and that could serve to dampen any rallies going forward. And one more thing we read this morning deserves attention. One of the contributing factors to the weak bond market last week, prior to Friday, was a report that Goldman Sachs had revised their outlook for growth in the 4th quarter from 1% to 3%. What that story didn't show was the fact that they then expect to see those numbers tail off next year, looking for 2% in the first half of 2010 and 1.5% in the second half. 

Finally, at the best levels of the day in equities on Friday, the Nasdaq had failed to exceed their highs from a week earlier when they posted a high tick that represented a 50.32% retracement of the bear market that commenced in late 2007. Both the Dow and the SPX made significant new highs but they backed away late in the day from their best levels that as of now, represent retracements of 38.4% in the Dow and 38.62 in the SPX. These are all just way too close to what are typically critical retracement levels, to ignore. Here, too, we may need to get past Wednesday to see how things play out with FOMC the likely key for stocks. 

So for today and probably even tomorrow, we expect to see quiet markets, perhaps even inside days as traders square up in front of what can prove to be critical news. The low tick on Friday in the 10-year futures still didn't fill the gap that has been there since late June while the cash 10's continued to hold at our only nearby 2-star support of 3.882. While the very short-term charts give the appearance of a market that may need another low given the corrective look that has developed since Friday morning, the support at 114-15/17 is very, very strong as is that at 3.89 and again at 3.96 in cash - not to mention the 4% area on a real flush - and we doubt that those areas don't attract buyers if tested. Unless and until we get some further 'bad news' for bonds, we should be at, or very close, to a nice rally.

8/07/09 - 9:00 - Well the numbers have come and gone and so far the markets have only gone - down that is. The NFP number came in at -247,000 with expectations having been at -325,000. At least the was the overall consensus for the number although late yesterday, Goldman Sachs revised their estimate down to -250,000. Given the recent disclosures that their traders are making money at the rate of $100mm a day, who can argue with their guess? Maybe that means that next month we will see today's number revised up by 3,000. Enough of the conspiracy theory though. What is important now is that we got great numbers for the economy - but not so great for the bond market. The reaction so far has been troubling but for now, my best count still has us in the B-wave decline that I have embraced for weeks now - and much closer to a resolution of  what happens next. If the ultimate outcome is that we trace out a triangle for a 4th wave of the bigger move that commenced in December, today's lows could prove to be the bottom of that B-wave. Upon the release of the number, the 30-year filled a gap left from 6/22 with 3 ticks to spare before quickly recovering. The cash 10's, meanwhile, touched the only 2-star support number I had at 3.882 and held but the market to watch, the 10-year futures, traded into the gap it had left on 6/22, but so far, has failed to completely fill it completely even after a second attempt at about 11:00. That seems to have been the pattern of late as many of the bigger swings since the June bottom have traded into gaps and then reversed without filling them. There is also a wave-equality target at 114-15 while the gap fill number is 114-17, so that small range of 114-15/17 may very will represent the final target for the end of any 'triangle' B-wave decline. If this area doesn't hold, then we are likely to test the June bottom at 4%. That could complete the B-wave of a flat correction, otherwise our intermediate wave work has been incorrect and we are in fact, already impulsing down to finish off the first leg of a bigger bear market at somewhere through the 4% June bottom. Right now is is difficult to tell which is the right call but it is not so difficult to manage the risk from here. A trade at 114-14 would be a strong suggestion that we will see 4% and during next weeks 10 and 30-year auctions would be a good guess as to when. 

The good economic news has had the predictable effect of producing a rally in equities and this can prove very important as well. Several weeks ago I posted targets for the NDX, the Dow and the SPX, all very important levels and all within reach, though still well above us at the time. The NDX target was 1629 and that represented a 50% retracement of the bear market there that had begun in 11/07. On July 30th, that index traded to 1632 and backed away and that is still the high of the move. On that same day, the SPX traded at 996 while our target there, the 38% retracement of the entire bear market, was at 1014. Today, even though the NDX has held that 7/30 high, the SPX has traded to 1015, representing a 38.33% retracement of the bear. While we could continue to grind higher, the equity market seem to have collectively lost a lot of momentum and may very well run into trouble should the rally not extend from here - especially on this kind of news. That would likely serve to carry fixed income out of this hole so I think it very important to keep on eye on stocks in here as they could hold the key to the near-term fate of the bond market. 

For now, the critical numbers below are obvious; 114-15/17. A trade above yesterday's low of 115-10+ would be constructive and likely bring on added short-covering although it will take a trade above yesterday's close of 115-23+ to make any real statement.

8/06/09 - 9:00 - Last week, following two unsuccessful auctions that resulted in the failure of rallies that had commenced near the openings on those 2 days, the markets almost predictably opened weak on the day of the third auction and then rallied hard proving that at least in this game, things don't always happen in 3's. Now, following several weeks of 2-side volatility with a bias to the downside, and capped off with one of the most extreme days with regards to 2-sided volatility of late, one has to wonder if tomorrow's jobs data might just be a non-event to the markets. Wonder we might but it would be hard to anticipate such. I would still think that we can see a statement coming out of tomorrow and even though we are at the low end of the range we've seen since the July highs, both the 10's and the 30's are still close to the mid-point of all that has happened since the June 10th bottom. 

Yesterday saw the treasuries open sharply lower but establish their lows in the opening minutes and go on a tear that eventually saw the 10's trade more than a point off the low with the 30's running a point and 5/8ths before settling down for several hours before the afternoon brought with it a complete meltdown that saw the long bond make new lows on the day while the 10's gave back all but a few ticks of their rally. Some attributed the reversal to the downside to an upside revision of their GDP forecast by Goldman Sachs and who's to argue with a firm whose traders we now know to have made in excess of $100 million on 46 different days last quarter, while losing money on just 2! At any rate, the selling carried over into this morning with the 10-year futures squeezing out another marginal new low of the move while the cash has finally filled the gap it left on 6/22 at 3.777. With the economic news continuing to show more and more signs of improvement, it is no wonder that we are heading into the jobs report under pressure but nobody - except maybe those traders at GS - know how the numbers will look so the rest of us will just have to wait and see. I'm still of the belief that in the bigger picture - extending out several months - we will see rates back near and very likely through 4%, however I also still believe that we are not yet in the impulse wave that will take us there. Based on the structure of previous waves, we should find support this side of the June bottom from which another up-leg should commence. If the news is bad for bonds tomorrow and next weeks auctions are not well received - which seems likely - then the short-term wave patterns may prove to be wrong although the bigger picture still strongly suggests that if once we trade through 4%, it would likely be in the 5th wave from the December top and that would likely be the final leg of at least this phase of the bear market. 

I mentioned yesterday that the daily stochastic oscillators were making higher lows than those from last week and any higher close could offer up a buy signal and while we didn't get that higher close, the oscillators didn't really go any lower so we are still in that same setup. A rally out of here will be accompanied by a bullish divergence but of course, we won't really know if that will happen until - you guessed it - tomorrow. Volume was extremely high which is understandable given the extreme volatility in both directions and while open interest increased, it is not so easy to interpret given the big swings in both directions. All signs continue to point to tomorrow for a possible resolution to the patterns which, in a perfect world, continue to point to a rally commencing but likely from a lower low than what we have seen so far.   

8/05/09 - 9:00 - When the markets closed on Friday after having rallied 2 points off the Wednesday lows in the 10-year and more than 4 in the 30's, as strong as the rallies may have looked to some, one could make that case that they appeared to be one driven by short-covering based on the lack of any pull-backs throughout most of those moves. That fit well with my notion that we were still in a down market. The idea that the decline that had commenced in early July was a B-wave, my current preferred count, suggested that it would be choppy and the upcoming jobs report seemed reason enough to believe that once the short-covering had ended, things would settle down and we would likely drift into this Friday's data with a downside bias. Monday, however, saw the treasuries give back all of their gains from from Friday and then yesterday, after a firm opening, the 10's rallied back to a perfect 50% correction of the previous decline while the 30's were touching their 62% levels before both turned down with a vengeance and by this morning, the entire rally that had begun during last weeks auctions, had been erased in the 10's, even though the 30's had managed to retain nearly half of their gains. The bottom line is that while my negative outlook has been bolstered by the action of the past 2 days, at this point I appear to have underestimated the grip that the bears had on the markets. In the bigger picture, my B-wave theory is still fully intact as even though the 10-year futures have produced a new low of the move that began on July 10th, they are still trading very close to the lows established back on 7/20 and not yet 62% of the way back to the June bottom. The cash 10's have actually held this morning at 3.766, the exact level that held them last week when they entered, but never filled the gap left on 6/22. It's difficult to understand why gaps work as well as they do but for now, the 3.777 area in the 10's - the print that would fully fill that gap - is doing a fine job of discouraging selling. Should it give way, we can only hope that my B-wave theory proves to be correct. 

Elliott wave theory would suggest that if this is indeed a B-wave, then given the structure of what I am calling the A-wave, we should either return to the bottom made in early June in what will ultimately prove to be a 'flat' correction before rallying once again towards the 3.25 area, or we are in a 'triangle' that would target a higher low than that made in early June, as the markets continue to contract their range before an eventual break through 4%. A favorite tool that I use to project an impending low is a 'wave equality' measurement and if you apply it to the cash chart, it projects a break down to 3.99 vs. the 4.01 high yield of 6/11, a near perfect 'flat correction' target. If applied to the futures charts, it projects a low just under 114, more than a point above the June bottom and a nice spot for the B-wave of a triangle to bottom. It seems that no matter how I view what is happening, that the jury is still out regarding the immediate pattern although the bigger picture remains negative.

I have been addressing the more traditional indicators of late, namely oscillators as well as volume and open interest, in an effort to help clear up the currently cloudy picture. With the new lows today in the 10's, the daily stochastics are well above the levels that they were at last week at the low and thus, have a setup for a bullish divergence if we can manage to reverse to the upside from here. Open interest in the 10's continues to decline suggesting that in addition to last weeks rally being dominated by short-covering, the current decline is being driven by long-liquidation. That may not sound good but the fact is that when we enter the next phase of the bear market - presuming we are in one - the open interest should increase as prices decline indicating a willingness on the part of sellers to take on new positions. The bottom line here is that I see no indication now that this recent decline is anything worse than a B-wave. 

There is little in the way of news to report and until Friday morning, that should continue to be the case. I continue to suspect that next week's auctions of long-dated treasuries will hold the markets down based on the poor auctions of the short-dated issues last week. The jobs data on Friday seems to be the one potential 'fly in the ointment' for the bears as there is just no good way to know how those numbers will come in. I still see good support in the cash 10's at today's lows based on the previously mentioned gap as well as in area of 115-01 to 115-05, which had been my objective last week and below there, another gap exists from 114-27 down to 114-17. Should the markets manage a higher close today, then the previously mentioned 'bullish divergence' on the daily stochastics should attract some attention and should at the very least serve to support the markets heading into Friday's numbers.

8/04/09 - 9:00 - On rare occasions, I look at the markets in the morning and just have nothing new to talk about. This is one of those days. After an explosive post-auction rally on Friday that was helped along by disturbing GDP numbers, the markets gave up all of those gains yesterday before stabilizing and they have now caught a bit of a bid this morning, perhaps helped along by a slightly softer stock market. That said, the patterns of everything from internal waves to oscillators, volume and open interest look about like they have for the past several days and as long as that is the case, more of the same back and forth action can be expected. The amplitude of the swings, however, can be expected to dwindle as we move through the week and inch closer to the jobs data which, along with any break in equities, may be the most likely source for a friendly surprise for bonds - if one is in the cards.

The 10's are currently testing 50% retracements of yesterday's break which come in at 116-20 (3.581) while the 30's are have touched their 62% level at 118-12 (4.359). Should these levels give way, we could test Friday's highs once again. Should they hold, the swings could continue to contract for the next several days. For today, a trade above 116-26 in the 10's will be at least mildly constructive while one below 116-07 would give that chart the appearance that prices are headed lower. The SPX needs to take out 882 to show any real signs of weakness and 1014 still looms as an important target should that index extend the rally. 

8/03/09 - 9:00 - After a good day on Friday capping off an upside weekly reversal, the markets have weakened considerably this morning suggesting that much of Friday's bid may have been the result of short covering. When shorts get caught off guard, the result is frequently a rally with few pull-backs and that certainly describes what we witnessed on Friday. Despite having rallied a point and 3/8ths in the 10's, the biggest pullback all day was just over 1/4. Additionally, preliminary numbers show that the open interest in the 10's actually declined even though that wasn't true for 30's. So now, with a few possible speed bumps along the way, the markets should settle down as they await Friday's jobs data which has offered up surprises the last 2 months - the first on the bearish side for bonds and the second on the bullish side. As things stand right now, the mid-point of the range since 7/15 is 116-24+, right about where we were trading early and not a bad guess for where we might be by weeks end. 

While Friday's closes were strong in every respect, I had stated in the report that I doubted that the rally could extend very much and that the markets should stabilize heading into Friday's data and that was based on the fact that I continue to think that we are in a downward leg that commenced on 7/10, as well as levels that we were approaching at the time that report went out. At the best levels of the day on Friday, the 10's poked their head through a 50% correction of the move from 7/10 before stalling out. 30-year futures got to within a quarter point of a trend-line drawn from the 12/08 top even though cash broke the equivalent line by several bps. Keeping in mind that that trend line is 8 months old and from a swing nearly 200 bps away and Friday could be considered to be a near miss. The 30's also managed to fill the gap that had been left from 7/15 but not the one left from the 14th. At the end of the week, although we had rallied hard from the mid-auction lows, there was nothing about the wave patterns that have been developing since June, that had changed, leaving them to look corrective and therefore, not likely to continue to produce new highs. Remember that since the rally out of the June low stalled out on 7/10, I have looked for the trade to become increasingly choppy and if that call is to ultimately prove correct, the rally is not likely to have much room left in it - especially in front of a number as critical as Friday's.  

It has been reported that bank holdings of U.S. Government debt is up 15.6% from a year ago while the average annual increase has been just 8%. This seems to reflect a continued appetite for safe assets by banks and while it has definitely helped out the treasury markets, it also clearly shows that those same banks are not aggressively making loans. Also this morning, I see the first of what will likely be a number of stories about next weeks auctions of longer-dated securities and how the markets might - or might not - digest them. This comes as no surprise given the lack of interest in the shorter-dated securities sold last week and without some real help from the jobs data, it could hang heavy over the treasury markets.

The stock market weakened somewhat on Friday after the NDX touched the first of 3 very significant targets we had highlighted last week but it has regained a bid this morning. There too, the jobs data may be too important for the markets to do too much in front of but if we do continue higher, the next number likely to prove problematic will be near 1014 in the SPX. Stocks and bonds should continue to trade as mirror images in the bigger picture and I continue to believe that the stocks offer the best chance for bonds to prove me wrong with regards to the bearish outlook for the months ahead.

As far as fixed income is concerned, daily stochastics remain neutral to friendly and the moving averages that I had eluded to early last week that were above the markets, were all cleared on Friday although today, they are threatening to give way again. As mentioned earlier, open interest is giving conflicting signals from 10's to 30's. The bottom line is that while the lows we saw last week are not likely to give way before Friday, the highs set on Friday may also prove difficult to exceed without some real surprises. This continues to look like a B-wave decline to me and until proved wrong, I will treat is as such, looking for a continued choppy market but one that is biased to the downside.