^_Tbondtrader

 

7/31/09 - 9:00 - Following nearly identical trading days on Tuesday and again Wednesday when the markets tried to rally all morning only to collapse at the 1:00 auction times for 2's and then 5's, yesterday was just the opposite as early weakness gave way to a sharp rally when the 7-year went off. That is so counter-intuitive given that the 7-year has never been an attractive maturity that is was predictable from the standpoint of 'contrary trading' as you could see from yesterday's comments. The overall poor performance of the markets during the auctions was the result of poor indirect bidding, that which includes foreign central banks, and that may prove problematic for the markets heading into the 10 and 30-year auctions on the 12th and 13th of next month but for now, things are looking up. 

If I detach myself from wave analysis and look at the charts from a more traditional perspective, this would appear to be the place where a rally could really grab hold. The volume and open interest patterns are neutral to friendly for the 10's but clearly positive on the 30-year charts while stochastic oscillators have turned up from being oversold. There are no divergences in the 10's but there are in the 30's and those oscillators appear to be pulling the markets out of oversold territory. The low in the cash 10's came on Monday while the futures bottomed on Wednesday but both days were near perfect 'doji's' on daily charts; a candlestick pattern that suggests a trend change is occurring. The bottom line is that there is ample evidence that a bigger rally can develop from here although I suspect it will be a corrective rally and not one that will challenge the July highs.

While the rally began with the 7-year auction yesterday, it was helped along this morning by the GDP data and not so much the headline number as the revision from last month and also the personal consumption numbers. The fact that the range of estimates for GDP included +.7% to -2.9% is a clear sign that there is nothing clear about the recovery. The next news item that everyone will have to focus on will be the jobs data one week from today and that can be huge. Between now and then, a stabilization of the markets can be expected as we have already tested some powerful resistance this morning which includes 50% retracements of the entire decline in the 30's and 38%'s in the 10's as well as a gap in the 30-year. It seems doubtful that we will extend this rally a great deal from here before the BLS report. 

The stock market had another good day yesterday but those key levels I've posted recently still matter and yesterday, the NDX traded at one of them. The high there came in at 1632 while the 50% correction of the entire bear market was at 1629 and that index closed at 1609. For now there is no evidence that the rally is over but we are entering a zone of very significant resistance numbers and if you look at a chart of the Dow going back a year or so, one thing that is apparent is that since the March bottom, volume has been steadily declining and that is not a healthy sign. The stocks continue to potentially hold the key to a better bond market than what we are anticipating. 

At the end of the day, if the close is better than 116-13+, it will give us a good weekly reversal and that would suggest that the market would remain strong into next week although it is our opinion that strong will translate to more of a sideways market than one that is producing new highs each day. Still, against the backdrop of what has been happening since early July, that would be a good thing. A trade below 116-12 would suggest that we have seen the highs for the time being while a trade at 116-30 would give reason to think we can still push into the mid 117's.

7/30/09 - 9:00 - If you weren't paying close attention, you might have mistaken yesterday's action for that of Tuesday. Both days saw the markets open with a bid, only to collapse at 1:00 auction time. Today brings the 7-year note and while that maturity has never been a popular one, it wouldn't be too surprising to see the markets weak heading into 1:00, and then firm up following what everyone now figures will be another weak attempt to sell U.S. debt. They never make this easy. With the 10's having broken one layer of good support yesterday but not quite having made it to the next, which I think is best at 115-03/06, I wouldn't be surprised to see that level tested today but if that happens, I think we can continue the trend of choppy markets and see some sort of a bounce. 

On Tuesday, the 10's dropped 30 ticks in about an hour following the 2-year auction and yesterday they fell 28 ticks in about half the time upon getting results of the 5-year. And while at first it seemed a little odd to see such a reaction from the long end of the curve based on short-term note sales, the cause seems to be the result of very poor indirect bidding; that which includes bids from foreign central banks. Indirect bidders for the 2-year bought just under 33% of the issue, down from nearly 68% at the June auction and then they took down only 36.7% of the 5's, down from just under 63% a month ago leaving auction watchers to wonder whether demand for our debt from foreigners is dissipating. That sort of thing could haunt these markets for some time to come so regardless of what happens next week, as we approach the 3, 10 and 30-year auctions which begin on 8/11, it wouldn't be surprising to see the treasury markets come under pressure once again - assuming they don't remain under pressure until then. 

A B-wave, my current preferred wave placement, figures to be choppy and difficult to read but this one is especially so, given the basis shifts between cash and futures as well as the curve trades between 10's and 30's. On Monday, the 10-year futures made a low at 115-19+ which was broken yesterday and tested again this morning. The cash 10's traded at 3.766 on Monday and yesterday, they only managed to get back to 3.733 and they are now back below 3.70. This makes for much different looking wave patterns on those 2 charts and if that weren't bad enough, the 114-30 trade in the 30's on Monday is more than a point below us now. The Elliott wave book that taught me the theory stated that 'if you don't know where you are, you are probably in a B-wave' and that pretty much sums up my feelings here. 

Yesterday's Beige Book release suggested that the pace of the recession has slowed and also yesterday, 3-month $ Libor traded at the lowest level on record; both facts helping to feed the notion that the worst of the economic news is behind us. Until the labor market improves, however, one has to wonder if that notion is actually true. That should be the main focus of the markets heading into next week and the BLS report. 

Having not changed my mind about the likely wave count for bonds, I still think that the most important levels we need to watch in the immediate future are those mentioned yesterday for stocks. We're not there yet but we are approaching great sell targets for equities and if the economic news continues to show a light at the end of the tunnel, we will be soon. I won't keep posting them here until we get closer but I do expect them to have some sort of impact if tested and probably a big one.

For the rest of today, any trade below 115-19+ should be followed by a test of the 115-01/07 area. If at any time that area gives way, we will then probably test the gap from 114-26+ to 114-17 and we all know by now how important gaps continue to be. The wave structure since Monday's low is corrective and that would mean that any test of the upper 116's - especially from 19 to 26 - will likely be sold. Additionally, the decline from the high on Tuesday is currently corrective in nature and that means that absent a break below yesterday's low, we should head back up into the upper 116's Watch out for a 1:00 surprise.

7/29/09 - 9:00 -  In Monday's report, I had focused on gaps from 6/22 that had held on the early break and while there wasn't much in the way of a rally then, yesterday the markets showed some signs of life as the 10's eventually traded more than a point above Monday's lows and right at the time of the 2-year auction. It's difficult to draw the conclusion that a 2-year auction would influence the direction of long-dated treasuries but at precisely 1:00, the markets rolled over with the 10's giving back nearly a point in just an hour. The decline that had commenced on the 21st following the first day of Chairman Bernanke's Congressional testimony looks to be a clear 5-wave decline and at yesterday's best levels, while the 10's fell 3 ticks shy of their 50% retracement of that preceding decline, the 30's nailed theirs leaving the charts with a decidedly negative look to anyone who tries to read wave structure. Today has begun with a bid but still, one has to be concerned with a market the heads down on good news - the Bernanke testimony - and then fails at or very near a 50% recovery of the break. The good news may be that those gaps have stemmed the decline but so too did gaps stop the rally on the 21st and I continue to believe that ultimately, the markets are headed lower even if they journey will continue to be choppy. 

Perhaps the biggest news story yesterday came from a report that showed home prices in the U.S. rising in May for the first time in 3 years. Forget that the numbers were not seasonally adjusted, the fact is that the pace of the annual decline slowed for the 4th consecutive month and that has to be a good sign. The real number came in at +.5% while surveys had suggested it would be -.5%. And this morning, one of the more widely circulated stories addresses the meeting between policy makers of the U.S. and China and how they have pledged to keep their stimulus efforts in place until an economic recovery is secured. At least, that is how a Bloomberg story reads. One from the WSJ, however, points out that the Chinese conveyed continuing concerns about the growing amount of U.S. debt and its' effect on the dollar and more importantly to them, on the roughly $800 billion in U.S. debt that they hold. It seems that this story will just never go away. 

In Monday's report, I also made mention of what appears to be a date between the SPX and a seemingly psychological barrier at 1000, a level not seen since November. Stocks and bonds have pretty much traded as a mirror image of one another since the economic collapse got into high gear and a failure in the stock market could attract more interest in bonds than my preferred wave count might suggest. Upon closer inspection, there are key levels in front of us in all three of the major stock market indices that merit close attention. At 1014, the SPX will have retraced 38% of the entire bear market while the equivalent number in the Dow is at 9422. These levels represent the first solid objectives for a corrective rally to end although it was hard to imagine that we could even approach them back in March. Additionally and remarkably, the Nasdaq will retrace 50% of the entire bear market at 1629. Those 3 objectives are 35 SPX points, 324 Dow points and just 24 Nasdaq points from yesterday's closes - one really good day. Yesterday, for the first time in 11 trading days, the SPX took out the previous days low even though it recovered pretty well before the close. Much of the recent strength has been the result of good earnings reports and no less than 1600 companies will still report by this weekend.

If yesterday's break in bonds came as a result of the 2-year auction, which the timing of it would suggest, then today and even tomorrow when we get the 5's and the 7's, there could be a greater impact. my wave analysis suggests further choppiness but with a downside bias, but for anyone who doesn't look at waves, the markets have rallied out of the June lows and then traded sideways to lower, giving back some, but not nearly all of their gains. That could be construed as friendly. Beyond this week, the focus will turn to the jobs data and until that comes and goes, the fixed income markets may well remain range bound. Eventually, though, gaps above or below that for now are defining the range, will give way and a bigger move can commence. I continue to think it will be down. Below 116, the 10's may well be headed to at least the very low 115's while a trade above 117-06 will suggest that the gap at 118-04/09 will be attacked.

7/28/09 - 9:00 -  I'll keep this brief this morning as there just isn't much new to address. The markets held gaps yesterday but didn't do enough on the upside to suggest that we are really going anywhere. A little follow-through buying entered the markets this morning but still, hardly enough to mean anything and so far, the best levels were seen in the first few minutes of trading. The rally, if you want to call it that, doesn't appear to be anything more than a bounce as it is very corrective looking, although that can change with a good upside burst today. Absent that, a move back to the lows set yesterday seems likely and it would be disappointing if those gaps don't ultimately hold. Should they give way, then the area of 115-03/06 in the 10's represents a solid retracement target as well as a wave equality target and that should also attract some buying but it was gaps that stopped the recent rally and it would be nice if it were gaps that supported the break. 

Preliminary numbers show a rather substantial increase in open interest yesterday in the 10's - about 55,000 contracts - and that would suggest that new buyers entered the markets, typically a good sign when looking for a low, although one that leaves the markets vulnerable should they give up yesterday's lows. I can't even find articles addressing the TIPs auction yesterday and that would suggest that it wasn't all that well subscribed. Not to worry though as that might indicate a lack of inflation worries, at least at these levels. Today we get the 2's followed by 5's and 7's tomorrow and Thursday and while the 7-year is never anyone's favorite, it would be good for our markets if that one were to be the best of the 3 auctions. 

Finally, while my preferred wave count would have the markets ultimately headed lower, should the stocks turn down for anything other than a minor corrective pull-back, it could to support a fixed income rally of greater magnitude than what I am looking for and we are approaching some interesting levels in all of the indices. Generally speaking, the 1000 area in the SPX could represent a strong psychological barrier, but perhaps more importantly, at 1014, that index will have retraced 38% of the entire bear market that began in 2007 while the equivalent in the Dow is at 9422 and the Nasdaq recovers 50% of all of its' losses at 1629. That's 32 S&P points, 300 Dow points and 30 Nasdaq points from here and that isn't much more than 1 good day. While there is no certainty that stocks will stop at those levels, at least with regards to the SPX and Dow, they do represent the first real retracement targets of significance, since the March lows. 

The 10-year futures chart is just too sloppy to make any sort of wave-based call from here although in cash, it seems that the number that needs to hold is a 3.71. If we trade through there, then yesterday's lows will seem to be in jeopardy and until the futures can trade through 116-24, there just isn't anything to get excited about.

7/27/09 - 9:00 -  While Friday’s close was above the 116-08+ print that I didn’t want to see, you couldn’t tell that by the first hour of trading today. Selling pressure from the opening bell carried the 10’s down ¾’s of a point in the first 40 minutes but so far, the markets have held at interesting levels that could create a tradable low.  Both the cash 10’s and the 30-year futures have traded into gaps left on June 22^nd, and both attracted buyers before those gaps were filled. Let’s not forget how the markets rallied into gaps following Fed Chairman Bernanke’s Congressional testimony last week only to fail without filling them. I think it doubtful that we are producing any sort of bottom in here, but as I have continued to point out, if this is not a worse case scenario whereby the fixed income markets are impulsing towards the lows established in early June, then strong rallies can be expected along the way to still lower prices and we could be about to see another one of those rallies. While the support areas generated by the gaps mentioned above have the ability to support a nice rally, my preferred wave count would still have the markets headed to near-term objectives that seem to begin near 115-03/05 in the 10’s  – lower in the longer horizon – and most technical signs seem to support that wave based analysis. We are reaching oversold levels on daily charts but so far, without any signs of a significant bottom being made and a quick glance at the charts after Friday shows that the volume during Friday’s rally was less than half of what it was during Thursday’s break. Additionally, all but the 10-year futures have given back more than 62% of the gains made since the June 11^th bottom and some fairly dependable moving averages have been broken during the past 3 trading sessions. It’s just not a pretty picture.

In the bigger picture, stocks and bonds have traded as a near mirror image of one another as both posted extremes for the year in mid-March and then neither reversed their trends until June 11th. And while the stocks have shown few signs that they won’t continue to rally, one has to wonder what will happen if the SPX can print 1000, now just about 20 points away. One would think that would be a psychological barrier of sorts not to mention that we haven’t seen that handle since November. Most of the news headlines today seem to help explain how this is happening as they point to how traders are increasingly become less risk-averse. It has been reported that emerging market bond issuance is at the highest levels seen in more than 45 years, up 45% since 2007. Additionally, yields on bonds issued by ‘junk-rated’ companies are within a 10% yield spread of maturity equivalent treasuries and that means they are no longer considered to be ‘distressed’. The spreads of investment grade bond yields to treasuries have been cut in half and forecasts for the earnings of S&P 500 companies are being upgraded more often than downgraded. I could go on and on but the point is that at least for now, investors are seeking out yield even if it comes with risk and that is not the best environment for treasuries or even agencies.

This week brings with it 4 auctions by the Treasury for only the second time since 1976, as they will come with 20-year TIPs as well as 2, 5 and 7-year notes. That is a lot of supply – more than $100 billion – and it should make for a volatile week. While it may be a lot of supply, it does offer up a little something for everyone so it will be interesting to see just what part of the curve – or perhaps it will be the TIPs – attracts the most interest.   

As long as the above mentioned gaps can hold – 3.777 in 10-year cash and 114-28+ in 30-year futures – things will look interesting and especially so if we can reverse and close higher on the day. If they don’t hold, then we suspect that 115-03/05+ in the 10’s will be the next stop and that, too, will be a good support level. The 10’s need to trade above 116-03 to show significant signs of life.

7/24/09 - 9:00 -  A bid that has entered the markets this morning has done little to undo the damage done yesterday. In Wednesday’s update, I posted levels that I felt needed to hold if the rally was going to extend and by Wednesday afternoon, the 30-year had already broken below the ‘key number’ there even if the 10’s had not. Yesterday, following an early rally attempt, those levels gave way in the 10’s as well and the markets deteriorated for the remainder of the day, eventually taking out the lows established prior to Fed Chairman Bernanke’s Congressional testimony which began on Tuesday. This has to be a great disappointment to anyone who had counted on his comments to stem the recent decline in bond prices and leaves the markets about where I figured they were before the testimony began; in declines that are most probably B-waves with targets more than a point lower basis the 10-year in most any scenario. And if the decline is indeed a B-wave, then it figures to continue to be choppy and not only does that explain the violent rally that occurred on Tuesday and subsequent failure, but it also suggests that while we should be headed lower, further rally attempts can be expected - although I doubt they will overcome the highs set on Tuesday.

One of my fears was that the markets would rally but fail to fill the gaps left on the 14^th and again on the 15^th leaving them more vulnerable than they already were and in fact, the only gap filled during Tuesday’s violent rally was the lower one left by the 10-year futures. While there is no guarantee that we won’t head back that way again, it seems increasingly unlikely that those gaps will be filled and now, they only figure to make the charts appear all the more bearish to more and more investors/traders. While I loved objectives near 3.25 to end the rally, the lack of correct structure to the 2 rally waves out of the June bottom leaves me to think we have only seen the A-wave of an eventual ABC and possibly, the A-wave of a triangle which means that the final count will actually be ABCDE, but with the best levels likely to already be in place. While after Tuesday, that notion seem to be in jeopardy, now the burden has shifted squarely to the bulls to turn things around or we are likely to see trades near 115 soon and more likely, near 114 before this decline finds a bottom – and for now that seems like a best case scenario. One fear now is that leaning on the internal wave structure of those 2 rallies to come to the conclusion that we have only crested in an A-wave, could leave me ‘not seeing the forest for the trees’ as the market heads back towards the March bottom. We must stay on guard for such an outcome of this recent failure although I still think it unlikely.

In many ways, this week played out similar to what happened last March when out of the FOMC meeting came news that the Fed would be buying treasuries and mortgage-backs to help hold down interest rates. The markets loved the news and that was reflected in an explosive rally but one that produced the best levels the market would see going forward, within an hour of the news being released. This time the rally may not have been as dynamic but still, as soon as the dust had cleared from the first day of testimony, the rally evaporated and the sellers emerged. Heading into this recent event, the debate seemed to center around whether the Fed would continue its’ aggressive quantitative easing efforts vs. whether they would address just how they planned to unwind those steps. Chairman Bernanke did both, possibly diluting the effects of each. An article this morning quotes James Bullard, Chairman of the Federal Reserve Bank of St. Louis, as saying that “unless the central bank puts a strategy in place and presents it to the public, inflation expectations may run rampant”. It is the unwinding of the balance sheet at the Fed that concerns Bullard -- especially the $661 billion of MBSs acquired to push down rates on home loans, with plans to buy as much as $589 billion more. His concern is that when unwound, the sales of those assets will push lending rates much higher. This notion may or may not be contributing to the renewed weakness in bonds but something is and given current patterns, we suspect the selling will, on balance, continue.

As was the case one week ago, the weekly close figures to be an ugly one and absent a surprising recovery today, we are likely to be looking at worse levels next week. One thing I don’t want to see is another downside gap on Monday which becomes a possibility if the markets cannot get away from their lows. Any close today below 116-08+ would warrant full coverage over the weekend while a close below 115-21+ would suggest the next point could come in a hurry. It will take trades back in the 117’s to offer much in the way of hope for better levels next week.

7/22/09 - 9:00 - Yesterday, Fed Chairman Bernanke completed the second half of a balancing act that began on Monday night when he published an op/ed piece for the Wall Street Journal, laying out a 4-part exit strategy for the Fed. to be initiated once they feel that the recovery is on sound footing. This was apparently aimed at the inflation hawks who have played havoc with the long end of the yield curve. He followed up that published report with testimony yesterday which made it clear that the Fed planned to hold interest rates down for the foreseeable future. A little something for everyone it seems. The markets had all sold off on Monday night following the published piece in the Journal but recovered to the best levels they had seen since shortly after the highs established 2 weeks ago, during his testimony yesterday. Whether this proves to have been bounce in a continued decline, or a reversal of fortunes and the beginning of a new leg up, remains to be seen but from our perspective, the rally did nothing to disturb our preferred wave count; one that suggests that we are in a B-wave decline which should produce a choppy and 2-sided market, but one biased to the downside.

At the highs achieved yesterday near noon, the 10's had rallied more than a point and a half off their lows while the 30's improved 2 1/2 points from their opening levels in what could only be described as an explosive rally. When the dust had settled, however, it was pretty amazing to see just where the rally had stalled. While the 10's filled the gap that they had left on 7/15 and nearly entered the one left the day before, the cash 10's, cash 30's and 30-year futures all entered their gaps from the 15th, but none managed to fill them before backing away and they have slid a little further today. Given the powerful nature of the rally that had just occurred, it was a testament to the power of technical levels to see those gaps hold like they did. Whether or not they will continue to hold may be the real key to what lies ahead. I had suggested that the lower of the 2 gaps would likely be filled but that the secondary gaps could prove more challenging. Were we to fail from here and not even fill the lower gaps on 3 of the 4 charts I monitor, it would be more than a little disturbing. For now, the areas that need to hold if we are likely to extend the rally, are at 117-04 (3.569) in the 10's and at 117-11 (4.458) in the 30's. Should those levels not hold, I would then expect to see the lows from earlier in the week be taken out. And should the rally continue to overcome the remaining gaps, well then we may be headed back towards the 3.25 area but for now, I am sticking with my guns and calling for this rally to simply be a bounce within what I expect to be a very choppy downward move within a larger correction that commenced in early June.

While he came under fire from many Congressmen, the Fed Chairman was firm in his defense of the actions taken by the Fed as well as other Central Banks as he suggested that they had helped to avert a global financial collapse and set the stage for a modest recovery. He went on to warn Congress that if they did not get control of the budget deficits, that it would risk damaging the recovery. The fact that the actions taken by the Fed represent the bulk of the new spending should make it clear that the balancing act is not yet over and that we can likely expect to see bumps along the road to recovery. Perhaps more will come from his testimony before the Senate today, but by and large, the news seems to be out of the way and we can focus on the above mentioned market levels to guide us going forward.

The rally was accompanied by good volume and we are seeing some expansion of open interest coming off the lows of 2 days ago which is good but at the same time, daily oscillators have not reached into oversold territory and seem to still leave us vulnerable. The weekly oscillators look constructive and they will be monitored closely since they could be suggesting my B-wave theory is incorrect but until proved wrong, I will go forward with the mindset that we are in a bounce within a larger decline with targets more than a point below the lows already established. I will continue to look to be a seller in or around the remaining gaps and only stand down from a defensive posture should they be overcome.

Mortgages performed well yesterday and the Chairman gave no reason to think that the Fed will not continue to be aggressive in their attempts to hold down lending rates but should the 10's break below 117-04, I will still take that as a sign that we may have seen the best levels of the rally for now - and maybe for a while.

7/21/09 - 9:00 - Yesterday produced nice little upside reversals from new lows of the move, very near 50% corrections of all that has happened since the June bottom in the 10's as well as 62% in the 30's. The fact that the reversals came from downside gaps made the recovery all the more constructive suggesting that the openings represented exhaustion gaps but the fact is that most of the gains have already been erased this morning and as we all know, the move from here is all about the Bernanke testimony before Congress today and tomorrow. When the text of what he will say is released at 10:00 (I assume that it will be), the suspense will end, at least to some degree and the initial reaction should tell us what the rest of the next 2 days may hold in store; even if some surprises may come from the Q&A that follows the prepared text. Nothing has changed with regards to wave patterns and the more traditional technical tools are of little help. I continue to look for a 2-sided market for the near-term as we probe lower in what appears to be a B-wave within an ABC corrective rally from the June lows. That means we should eventually see rates move back towards - and probably through - the 4% barrier that turned back the 10's in June, but not likely immediately. If that pattern is going to prove incorrect, the Fed Chairman's testimony today could be the catalyst but without a really friendly surprise, the market seems to be suggesting that further gains beyond that 3.26 seen 2 weeks ago are not likely. 

While it seems that most of the financial world is divided on whether to expect the Fed Chairman to emphasize further efforts at quantitative easing or rather, address an eventual exit strategy by the Fed, Mr. Bernanke has taken a step at accommodating both by authoring an editorial in the Wall Street Journal overnight that lays out the possible exit strategy by the Fed. The timing seems peculiar with the testimony today but it does seem to help pave the way towards a focus today aimed at talking down rates, having perhaps appeased the 'inflation' hawks with Wall Street article. Unfortunately, the long end of the curve seems to have had no reaction - at least no positive one - to that article and that can't really be a good thing. At any rate, further speculation on what to expect today isn't worth much and so, we can only wait out the testimony and address the charts again tomorrow. Good luck!

7/20/09 - 9:00 - For the third time in 5 days, we wake up to downside gaps in the fixed income markets but for the first time, the gaps in all but the cash 30's were erased on the initial bounce. That leaves one to wonder if the aggressive selling that has gripped these markets since the recent highs on 7/10 may not be about to abate. While the economic calendar for the week may be sparse, the testimony by Fed Chairman Bernanke before the House tomorrow and the Senate on Wednesday can be huge and should entice traders to begin to stand down as they await his latest economic update. Speculation as to what may come from his testimony seems to be centered around two topics; some seem to be waiting to hear details of the Fed's eventual exit strategy while others want to hear that the 'quantitative easing' will continue. It may take a pretty good juggling act to appease both so expectations for some fireworks seem appropriate. 

When we began the week last Monday, we were trading with a 118 handle and the solid support levels below were numerous into the 116 handle. By Friday morning, we mentioned that we were watching support that 'began around 116-09 and extend down to the mid 115’s'. The day session low on Friday was 08+ and this morning it has been extended to 02 with an overnight low of 115-26+, which may prove to satisfy the concerns we had for a close below 116-17+. This leaves us with very little untested support for the next point and so much damage has been done to the charts as to make it very difficult to arrive at a very friendly longer-term forecast from here. Through the process of elimination, we have reduced the number of preferred wave counts to just a few and none of them make the prospects for further highs beyond 3.26 very likely, so unless the Fed can throw a real curve ball to one camp or the other, a trading range market within the extremes established since the June lows seems like a 'best case scenario'. Wave theory seems to place us currently in a B-wave decline which, while it can be very choppy, should see lower lows in the days and even weeks ahead but at the same time, if we are indeed in a B-wave, then the correction that began in early June, should persist for several more weeks anyway. Eventually, however, new lows below those from last month should be seen. 

Corporate earnings reports of late have helped to push the stock market back to within striking distance of the highs it established on the same day that the bonds printed their lows in June and news stories today suggest that the recent strength in earnings, stocks prices and oil may be suggesting a bottoming out of the global recession. This would also explain weakness in treasuries so here again, the Fed Chairman is faced with a balancing act, not wanting to throw a wet blanket on investor confidence but not wanting to see rates continue up either. It seems that what comes from this testimony will have large implications on all of the financial markets and while it runs through Wednesday, the main thrust of what he has to say will be known by mid-morning tomorrow with questions to follow. 

Our belief that we have entered a B-wave decline of a bigger corrective rally that began on 6/10 will not be tested until we close the upper gap left on 7/14 at 118-09 and even then, it won't be eliminated. For now, it is the preferred count. If the Fed Chairman doesn't pull a rabbit out of his hat, then any rallies that make it as far as the upper 117's should begin to attract many sellers while any further probes below 116 should find some support as the 115-29 area represents a 50% correction of the entire rally. The wave structure prevents us from believing that even from a 50% correction, we can make new highs but no doubt, others feel differently and that should prove to be good support. Even if the market doesn't care for Mr. Bernanke's testimony and this area does not hold, the 3.75 area in cash should.

7/17/09 - 9:00 - When this report went out on Wednesday, I felt that we were still ‘within an acceptable range for a correction from the highs of last week’. By the close of business on Wednesday, that was no the case. We broke down through enough support levels to be a concern from many perspectives and in doing so we also eliminated several potential wave counts, any one of which would have supported still higher highs. The only thing left on the chart that still suggested further new highs is the fact that the final high last week came in the form of a 3-wave rally, but that just isn’t enough to overcome the damage done in the bigger picture. Now, it seems clearer than ever, that we have corrected up from the June low leaving that low vulnerable, but at the same time, the lack of an apparent 5-wave rally from a secondary low on 6/19, makes the preferred count for now, that we have only crested in an A-wave and not the entire ABC, and that we are likely in a B-wave decline that can be very deep, but it shouldn’t represent the beginning of another bear market leg.

As we came away from the highs earlier in the week, my main areas of concern came from 3 different things; open interest patterns, overbought conditions on daily charts and the back-to-back downside gaps that were left on Tuesday and Wednesday. Upon closer inspection, I do find that while the open interest pattern for the 10-year is disturbing, for the 30’s it's a different and can be interpreted as friendly. The overbought conditions on the daily charts have been eliminated by virtue of the hard sell-off and now, the daily stochastics are beginning to dip into oversold territory. At the highs, they were not only overbought but they were flashing sell signals based on divergences. That isn’t the case now but still, the markets are becoming oversold. So 2 of the 3 things that concerned me the most are no longer as much of a concern. The third, however, the gaps, is a bigger concern today than it was 2 days ago, since yesterday we rallied to within a few ticks of the first gap in the 10’s, but never managed to trade into it and in fact, stopped instead right on the 38% retracement of the decline. That indicates that traders were lining up to sell in front of the gaps and that reflects aggressiveness on their part. Those gaps continue to loom as very negative on the charts and may well help to explain some of the weakness this morning.

One of the best ways to utilize wave theory on a market is to use patterns and levels to eliminate possible counts until you can settle in on a preferred count. When applied to this market, wave theory seems to have eliminated the possibility that we are impulsing up from the June bottom (something I never believed) and at the same time, it seems to be suggesting that the correction is not complete even if the best levels we are going to see, may have been achieved. Remember that the market rallied from 4.01 to 3.26 while my last and best objectives were at 3.25/3.24 before it seemed likely that we would test the 3.05 area which if broken, would have invalidate the bearish count altogether. For now, we must respect this decline and be defensive although I do suspect that a rally will develop very soon. I have some timing that begins today and extends through Tuesday and there are several areas of good support that begin around 116-09 and extend down to the mid 115’s. From any one of them, another rally attempt is possible and any rally now will set it sights on the gap in the upper 117’s. A second failed attempt to fill that gap could be the first indication of more trouble than what I now anticipate. The best wave count now seems to place us in a B-wave decline of a yet-to-be determined structure; most likely either a flat correction with objectives back near 4%, or a triangle which would trade between the June lows and the highs from earlier this week for the next month or so. It will take some time to decipher which is the most likely.

With a bad weekly close impending, there is little to get excited about right in here. A trade above 117 is needed to take the immediate heat off but if we cannot fill the first gap at 117-19+, further pressure next week is likely. A close below 116-17+ would warrant a very defensive posture over the weekend.

7/16/09 - 9:00 - The late update I sent out yesterday pretty much summarizes where I am with the markets and it could take a few days before I'm able to zero in on a preferred count from here. I still think that the damage done yesterday will prevent me from being able to forecast any new highs in the immediate future - if at all. It is very doubtful that we have impulsed up from the lows and that comes as no surprise as I always suspected this would be a 4th wave corrective rally but now, it is also becoming more and more doubtful that we have impulsed up from the low on 6/19 and if we haven't, then the entire move is not likely to be a completed ABC either. That leaves me to believe that we have seen the top of an A-wave from the lows in June and will now settle into a trading range that will last a month or more. Hopefully soon, through a process of elimination, I can settle in on good preferred count that will include downside projections but the one thing that the past 3 days have done, is enhance the notion that this entire rally, wherever it ends up, is a correction.

The two things that had disturbed me the most before this downdraft got its' legs were the fact that we were still pretty much overbought on daily charts even after the first point down - and that the volume and open interest patterns for the 10-year we indicative of a bearish market. Well here is some good news. In just 2 days, the daily stochastics have gone from nearly overbought to nearly oversold and should no longer influence anyone to be a new seller. And as far as open interest goes, I had failed to notice that while the patterns for the 10-year were quite disturbing, the same patterns for the 30's were quite the opposite. There, the open interest has increased since the June bottom, especially so during the past 2 weeks and then, since the top last Wednesday, it has come off dramatically. That pattern is not indicative of a bear market at all; rather just the opposite. I prefer to get my reads from the 10's, but still, to me the overall picture is not as bad as it looked before I examined the long end closer.

We have caught somewhat of a bid this morning, better than any since the highs, and may actually threaten the first of the gaps although so far, the minor resistance at 117-08 is holding us back. Having not made new lows of the move today, we are likely to end up with an inside day and that usually doesn't spell 'reversal' so while some things are looking better, we are still likely to be in a trading range in a best case scenario. 

7/15/09 - 1:00 - The break just after noon today is disturbing on many levels and makes the likelihood of a return to a new high at the original target of 3.25 pretty poor. Prior to the break of my 116-24+ support, a good case could be made for this pull-back being the C-wave of a 4th wave that began last Wednesday but having taken out 116-23, we have entered the range of the first wave in that count and that is not acceptable. Even if we tried to allow for a slight overshoot, a glance at the 30-year chart shows us so far below the equivalent that it just doesn't hold water and the same holds true for cash. The alternatives we are left with are that we have completed an impulse up in price and are now correcting that impulse but while not impossible, it is very difficult to make a good case for the rally out of the June bottom to be a completed 5-wave move and for now, I am disregarding that count. That leaves me to believe that we have seen the top of a 3-wave advance off of the June bottom and that would make it either a completed ABC, or just the A-wave. Since the entire rally doesn't appear to be a 5, the two remaining scenarios are that it is the A-wave up of a 'flat' correction meaning that the B-wave that we are in will test the June bottom, or it is the A-wave of a triangle which would suggest a narrowing pattern that will last for several more weeks at the least but one that will not see any further new highs. It may take some time to decipher which is the correct count but for now, we appear to be impulsing down as this has looked like a 5-wave decline from the get-go and once we find a bottom and rally, things should begin to clear up and I will post targets for the rally back up. Of all the evidence that is disturbing, those back-to-back gaps are the worst and if we cannot find our footing and at least fill the first one at 117-19+, acceleration to the downside may very well develop. For what it is worth, I do see some timing implications for a trend change on Friday and then again on the 21th or 21st. That doesn't necessarily mean a turn Friday and another early next week, but more likely one of those days will prove significant.

9:00 - For the second straight day, the inflation numbers came in 'as expected' - at least for somebody. This morning, just like yesterday morning when the bonds gapped down half a point in front of a PPI release that then came in much worse than estimates, the fixed income markets gapped down in front of CPI and again, whoever sold them was vindicated when the numbers came out. Given how quiet the overnight sessions have been for months now, it really does make you wonder. And on the heels of Goldman Sachs reporting the best earnings ever. Oh well.

When I wrote Monday's report, having felt that the new highs achieved on Friday were likely to be from a B-wave based on the 3-wave pattern of that move, I was expecting a return to somewhere near Thursdays lows which were at 117-22. We got there yesterday and have extended the losses today but the levels achieved are not a real concern - not yet. For now, we remain within an acceptable range for a correction from the highs of last week, What I must concern myself with is wave structure and it isn't even the structure of the decline, since I believe this to be a C-wave and C-waves are 5-wave affairs just like impulse waves. Rather it will be how we rally out of this decline. A reversal with a 5-wave structure and we should be on the way to 3.25, however, absent an impulsive looking rally, I would have to be concerned that we may have seen a top. When you consider that I was expecting this rally from the June bottom to be a correction before we once again made a run on 4% - and that my best objective for the rally was from 3.25 to 3.239 and we have already been to 3.26+ - I am essentially waiting for 1 more little rally before the bottom falls out, a scary prospect. Just days ago the bigger concern seemed to be whether or not the longer-term bearish count had merit and now the worry is 'will we hold'.

While the pattern and price levels reached so far are acceptable, the fact is that we have turned down from extremely overbought conditions and sell signals from the daily stochastics and they are nowhere near oversold. Open interest analysis had suggested that the rally to the top last week was mostly the result of 'short-covering' and an uptick in that number since the highs reflects 'short-selling'. One would typically look for increasing open interest on rallies and declining open interest on pull-backs to support a bullish forecast. Add in consecutive downside gaps and the charts don't look so friendly. As usual, they aren't making this easy - at least not for me.   

One other thing I mentioned on Monday was how it was only the Fed that didn't seem to be worried about inflation, based on yield curve analysis and TIPs spreads and those worries by investors must have been amplified by the numbers released over the past 2 days. The bottom line is that now, we are in need of a reversal and one that comes quickly.

Sentiment is always another good indicator of market direction, usually a reverse indicator and this morning I see that mutual funds grew more in the second quarter this year than at any time in the past 2 years but more importantly, from April to June, cash flow into bond funds was double the cash flow into stock funds; an indication that the 'public' may have bought the top of the bond market. And while I feel that stocks will head lower, they are suddenly well-bid again.

I had no less than 10 objectives from 118 to 117 in the 10-year, based on among other things, trend-lines, Fibonacci retracements and Fibonacci extensions and in 2 days we have manage to eat though every one of them. I still have a solid support area around 116-24/26 but should that one give way, my worries will only escalate. For now though, we seem to be in a 5th wave of the decline that began on Friday as well as in a smaller 5th wave of a move from yesterday. A reversal soon seems probable and how we rally - if we rally - will tell me all that I need to know going forward. What I am calling a large wave-2 of the move from December, the move from February to March, lasted 27 trading days and today marks the 23rd day since the June yield crest. If this is indeed the 4th wave of the move from December, that would make Tuesday of next week an ideal day to post a new price high of the move - if we can just turn up. A trade back above 119 would look great today as that would at least eliminate this morning's downside gap. The journey of 1000 miles...............

7/14/09 - 9:00 - The fixed income markets came under some selling pressure overnight as if someone knew what the PPI report was going to look like and low and behold, we got some really ugly numbers on the inflation front. The month to month change in the headline number was twice the estimates while the core was even worse and in a classic example of 'buy the rumor and sell the fact', the fixed income markets found support just after the release. It makes you wonder of this is really an even playing field. But even at the worst levels of the day, things looked about as they did coming out of yesterday which is to say that we are likely in a downside correction to be followed by a higher high in the neighborhood of 3.25 in the 10's.

I'll apologize now for this paragraph as it gets a little deep into wave theory, but I think it's in order. I mentioned yesterday that the decline from Wednesday's highs to Thursday's lows looked like a 3-wave decline suggesting it was an A-wave and that the rally to the new high in the 10's on Friday was a clear 3-wave move making it a probable B-wave - especially since the 30's never got back to their best levels from Wednesday. That would leave us in a C-wave decline that should find a low in the next day or so. If this is a flat correction - now the best count since by taking out Thursday's lows this morning we have eliminated the triangle as an alternative - then the perfect place for Thursday's highs to have come would have been right up against Wednesday highs. Now this may be rather unorthodox but if you average the low yields for the 10's and 30's on Wednesday and then compare it to the average of the low yields for the 10's and 30's on Friday, they are nearly identical, supporting the theory that it was indeed a B-wave high. Targets for the C-wave low are not perfectly clear but there are no less than 9 that fall between 117-22+ and 117-06+ and based on the action since Wednesday, we appear to have been in the 3rd wave of that C-wave when we gapped down this morning. If all goes well, then once this 3rd wave bottoms, we should stabilize for half a day - give or take - and then push to one more new low to finish off the correction in front of a probable test of the 3.25 objective.

As mentioned yesterday, the open interest pattern is disturbing as it generally deteriorated since shortly after the June bottom and then came off nearly 50,000 contracts during the last 2 points up in the 10's. Additionally, yesterday stands out as a low volume day which, when they occur at the high of a move are disturbing at the very least. Daily oscillators are still very overbought and suggesting sell signals are just developing so without the aid of wave theory, there is plenty to be concerned about but we do still have that wave theory and it is suggesting that a rally to a new high will still unfold.

Given that much of the break since yesterday can be attributed to an ugly inflation report, and that we have another one on the dock for tomorrow, it would seem unlikely that we would get any sort of strong reversal today so we will probably need to get past tomorrow to see our rally develop - and maybe hope that the CPI report is not as disturbing as was the PPI. Just remember that it seems to be mostly the Fed who are not worried about inflation since the slope of the yield curve as well as the spreads between TIPs and notes suggest investors are indeed worried.

For now though, this still seems to be just a correction in an up market so if we can dodge a bullet tomorrow, all should be well. It is a little difficult to find a real 'uncle point' below but for now, while not wanting to wait and see if this level can hold, so long as we remain above about 116-14, the patterns still hold up.

7/13/09 - 9:00 - Friday saw the 10-year extend its rally to new highs while the 30's continue to trade below the best levels achieved on Wednesday. Taken collectively, the 2 charts seem to suggest that Friday represented a B-wave high, since the rally from the lows established late on Thursday appears clearly to be a 3-wave rally. The implications are that the explosive rally on Wednesday was a third wave of some degree, probably of a wave that commenced on 7/7, and a still higher high is to be expected later this week. Should the short-term chart patterns prove accurate, then we can expect either a return to near Thursday's lows at 117-22+, or more of a narrowing pattern that produces several moves back and forth with the range of Thursday and Friday. In either case, it shouldn't last more than a couple of days and once completed, I continue to like upside targets near 3.25/3.24 in the cash 10's.

I continue to look at the daily charts of the fixed income markets and see extremely overbought conditions; in some respects, rivaling those seen at the top of the market last December. Since the bottom on 6/11, volume has been lackluster while open interest reached its' peak 5 days after the bottom and has deteriorated since then. These factors point to, at the very least, a corrective pullback in the near future and should we see any sort of a reversal from a new high of the move, it would probably be a good idea to increase hedge ratios to some degree.

Last week, I mentioned the stock market as likely being a strong influence to bonds and I still think that what happens to equities may hold the key to fixed income. The SPX broke some obvious support on Tuesday when it broke below the May lows of 878 but a wave-equality target at 864 remains intact. That target is the one that, if broken, suggests that we could be in for a deep decline and while we could still probe lower from here without breaking it, last week the Dow held further above its' equivalent while the Nasdaq traded slightly below its'. The bottom line being that if the move from the top is corrective, then the lows from last week are in a good position to be the lows of the move. Breaking below 864 SPX could have upside implications for the bonds over the near-term. The index needs to trade above 900 to offer any glimpse of hope that a low has been seen and there remains a sloppy but still possible 'head and shoulders' top so like bonds, some resolution to the current patterns is likely to come this week. Believe it or not, that market is already becoming oversold so the odds seem to favor a 'bounce' in stocks being at hand but I also suspect it will be just a bounce before a continuation of the down-trend. 

Another reason to think that bonds aren't likely to extend the recent rally too much in the days ahead is that next week, Chairman Bernanke will report to Congress and the speculation is that he will address the Fed's 'exit strategy' with regards to some of the massive amounts of economic stimulus. We will also see updated economic forecasts from the Fed and that could impact beliefs of not only how the Fed may begin to withdraw their efforts, but when. And as we move beyond today, last months inflation data will be released in the form of PPI tomorrow and CPI on Wednesday. No matter what the Fed continues to tell us with regards to inflationary expectations, the fact is that one of the better indications of how investors feel about inflation, the spread between 10-year TIPS and 10-year notes, recently touched 1.52, up from .09 in January and that suggests that inflationary expectations are very much real even if they may be misplaced.

For the rest of today, a choppy market seems like what is likely with only the stock market seemingly able to cause much excitement. By tomorrow, however, things can begin to change with the news and I continue to think that the initial move from the current range will be up to new highs although I also continue to believe that the current low yield of the move, 3.265, is not likely to get extended by much more than a few bps.

7/10/09 - 9:00 - In Wednesdays report I suggested that 'the rubber band had been stretched about as far as it could be without snapping' and added that 'Should the rally extend from here, then 50% corrections will become likely and those are about 1 1/2 points away in the 30's and just over a point away in the 10's'. Well, later that morning the rubber band snapped and then, following a super auction, the futures markets extended their rally all the way to those 50% targets that seemed so far away when I wrote that line just hours earlier. Heading into Wednesday, the high tick in the 10's had been 117-12+, 6 ticks above the 38% retracment target of the move from mid-March and when the final bell rang on Wednesday, we had exceeded the 50% target in both 10's and 30's but just a single tick. Those highs were extended by a few ticks after the 3:00 close. Then came yesterday and both markets took a beating which, at the worst levels of the day, saw 30-year prices back where they had been on Tuesday, although the 10's held up much better. Not to worry though as strong upside gaps this morning have brought the markets back to within striking distance of the highs. The rally doesn't seem to be over but just like when we had first tested the 38% levels, I now expect further improvement to be more difficult without some sort of backing and filling first.

When the fixed income markets first approached those 38% targets 2 weeks ago, the futures managed to poke their heads through their targets while the cash markets lagged and that scenario is re-playing at these new levels. While the futures may have pushed through their 50% targets on Wednesday, the cash markets didn't, each falling about 4 bps shy, so now the 4.24 area in 10's and 4.11 equivalent in 30's should act as barriers on any trip to new highs. If you consider how well the first areas of resistance worked before Wednesday, there is no good reason to think that these won't work as well. In fact, given that following the explosive moves that accompanied the auctions, we posted highs within a tick of the 50% targets in both futures markets that held until after the 3:00 close, it would be difficult to bet against the equivalents holding in cash, at least on the initial attempts. Who knows why these retracement levels work so well but how can you fight it. The bottom line is that we are now in a situation not at all unlike where we were prior to Wednesday; up against solid resistance and still, very overbought. Wave theory always suggests that explosive moves like what we saw on Wednesday are not likely to be the final moves of any sequence so we can expect to see higher highs attempted, but now that 3.24 area in the cash 10's seems like a barrier that won't give up without a fight. While I don't expect to see this rally extend significantly now, it is worth noting that the next Fib. based target is very close to 3.05, which is the same level that if broken, will force me to reconsider just what this rally really is so I do view 3.24 in the 10's and 4.11 in the 30's as hugely important.

I have always felt that the rally from the 6/11 bottom looked more like a 3-wave move than a 5 and while it may not be quite as clear now as it appeared on Tuesday, if it proves to be correct, then it would suggest that it could be either just the A-wave of an ongoing correction - or the entire ABC. We are now 21 days into the rally and given that what I am calling wave-2 - the move from 2/9 through 3/18 - lasted 26 days, the latter and more bearish scenario can very much be in play. Should we manage to make a new high in the days ahead somewhere near 3.24, and then fall back below this week's lows, a much greater amount of caution would be warranted. For now though, I expect to see the market stabilize, at least until we manage new low yields of this cycle.

Much of the recent upside has to be attributed to the weakness in stocks and on Wednesday, the SPX broke below the May lows and traded just below 870 before stabilizing. There is a wave equality target at 864 before the 840's should come into play and if that happens, the bid shouldn't leave the fixed income markets to any great degree. Below the 840's and the 10's may very well be headed to near 3% but I'll save that discussion for another day. For now, weakness in stocks should translate to at least a stable if not higher bond market. At the very least, the SPX needs to see trades above 900 to likely steal much of the bid from bonds. Right now, there is a 'head and shoulders' top formation that may keep pressure on stocks for the immediate future.

Bottom line is that I expect to see the fixed income markets remain well-bid with new highs of the move likely but the daily charts remain so overbought that a hard break, or at least a sustained sideways move, seems very likely in the near future. New highs should occur by next week and late next week, we will reach the point where this rally will equal the one that I am calling wave-2, with regards to time. That may prove to be critical. 

7/09/09 - 9:00 - At the end of the day yesterday, the action in the bond markets may have produced as many questions as answers. While the trend-line resistance that helped hold back the fixed income markets for the past several weeks is no more, the proximity to Fibonacci retracement targets is about what it was before yesterday. Of course the targets have now shifted from 38% retracements of the move from March 18th, to 50% and it didn't take long. In the early going, that 3.42 extreme yield and 38% retracement level I had been waiting for, along with the 117-17+ in futures, held just about to the tick but following each new high, came a higher low and eventually the last of the resistance gave way. By the time the auction rolled around, the 10's had managed to print above 118 and near 3.37 in cash and then came a virtual explosion following what was one of the strongest 10-year auctions in recent memory. By the close, they had added another point and when the dust had settled, we were once again right up against solid resistance areas based on Fibonacci retracement targets; this time, however, closer to what could be final targets if our preferred wave count proves correct.

Prior to Tuesday, the high tick in the futures during this up cycle was 117-02 while the 38% retracement target was at 117-06+. On Tuesday the futures pushed up to a new high at 117-12+ while cash managed to print 3.45, just 3 bps shy of its' target at 3.42. When the dust had settled yesterday, the futures had printed 118-18 while their 50% target was at 118-17+, and the cash traded to a 3.28 with the 50% target there is at 3.239. So while the retracements we are testing may have changed, the proximity to them has not. And if anyone doesn't think those types of targets matter, the simple fact that we could have had a 1 1/2 point range yesterday and still stopped within a plus of the next level in futures should convince them otherwise. The 30's acted much the same with the futures trading through their 50% target by about 1/4 point while cash fell about 4 bps shy. This morning, much like what happened on 6/29 when the markets first approached their 38% targets, the bid has turned into an offer and we seem to have rejected these new extremes - at least for the time being.

Having now decisively broken trend-lines in both 10's and 30's, the charts have a decidedly different look, especially to any bulls looking for a reason to think yields can continue to decline. That said, the price action around the obvious resistance areas derived from analysis which suggest that this rally is correcting the sell-off that commenced on 3/18, is enough to convince anyone that a continued bull market is no foregone conclusion. The rally still doesn't count out well as an impulse wave although admittedly, it is a little easier to swallow that pill today than it would have been prior to yesterday. Still, the entire rally looks to me to be corrective and now we have come very close to the second to last target before the count becomes invalid. That will occur when the 10's trade through 3.05 and there is some compelling evidence that we could test that area but I'll save that for another day. Until then, or until some form of wave pattern tells me otherwise, I will be defensive against yesterdays highs extended to about 3.24 in cash 10's. Assuming that the entire rally is indeed a 3-wave structure, the resolution from here is about what it would have been had the markets not exploded yesterday. The 3-wave look suggests that we are either completing the entire ABC rally here, or that this is the A-wave of an ongoing correction but once the A-wave completes, it may very well represent the best levels we will see even if there is to be a secondary rally down the road.

Not to be totally lost in the shuffle is the stock market, which broke significant support yesterday helping to attract a bid to bonds prior to the auction. After breaking the May lows, the downside momentum faltered and a late rally produced a positive close. The low tick in the SPX was 869 while support from the May lows was at 878 and a wave equality target exists at 864. Below there is another 20 point hole so that market isn't out of the woods yet but still, anyone looking to buy into the recent weakness should be attracted by the fact that we broke support and then reversed and closed back over it. I still don't care for that market at these levels but others do and we'll just have to see if yesterday's mini-reversal can turn into anything substantial.

I'll send along support levels for stocks later today or tomorrow but for now, let's just focus on bonds. It is way too soon to know if we are going to return to yesterday's highs,  but I suspect that we still will. A few days may be needed for any pattern development to help but until we erase all of yesterdays gains, a recovery is still a good bet. The early 'Key Levels' suggested a stop at 117-26 based on that area being the only good support nearby. So far, 26+ is the low so for now, that seems like the correct area for a clue going forward. Above 118-12 and the likelihood of new highs greatly increases but I would still expect any new highs to be very incremental, at least until we have some evidence that the next targets near 3% are achievable. The correction has now lasted 18 trading days while what I am calling a 2nd wave, lasted 26 so from a timing standpoint, just like price, we can be looking down the barrel of a gun in here. 

7/08/09 - 3:00 - More questions than answers. That may be what results from the upside explosion today as while the trend-line resistance that helped hold back the fixed income markets for the past several weeks is no more, the proximity to Fibonacci retracement targets is about what it was before today. Of course the targets have changed as in one day we overcame the 38% targets but basically have come to test the 50% targets. In fact, the futures, both 10 and 30-year, have exceeded their 50% corrective targets although the more important cash levels remain to be tested....assuming I write this update fast enough. The 30's are trading at 4.162 while the 50% target is at 4.114 while the 10's are trading at 3.282 with a 50% target of 3.239. Should we exceed those levels, while the 4th wave corrective rally will still be an acceptable wave count, it will not be such a clear picture. Of course, the rally doesn't have to go to an exact Fibonacci target and reverse. Few markets are that accommodating but for now, those are the last levels to test before we test the one that absolutely must hold if this is indeed a 4th wave correction and that is the wave-1 high at 3.052 in 10's, though it is not until 3.763 in the long bond. I will continue to assume this is a 4th wave until we exceed the 3.05 area.

11:30 a.m. - The SPX has broken below the May lows and with that went the final resistance numbers in fixed income. Overshoots happen and should the stocks recover, the 10's will likely finish on the other side of 3.42 but for now, the 3.25 area looks to be a realistic target for this rally. At 1:00 EST today, there is a 10-year auction going off and at that precise time, we can expect to see price volatility as a result of investors digesting the auction results as well as dealers adjusting their hedges to accommodate the amount of bonds they were awarded. There will also likely be some upside pressure on the markets going forward since the Primary Dealers who buy bonds at auction, then sell them to customers and must buy back their hedges when they do. Absent a recovery in stocks and/or a poorly received auction, it now seems like the path of least resistance is up in price. The bond market is still overbought on a daily basis but a lot can happen while oscillators are overbought

9:00 a.m. - Following a quiet day on Monday, the fixed income markets opened weaker yesterday but the lows established just after the opening held and an all-day bid extended the recent rally to new highs in all but the 30-year cash market. While the very significant amounts of resistance in this area have done a good job of containing the rally since late June, most of the more significant levels have been overcome leaving us close to what could prove to be a 'breakout' should we manage to keep the bid through today, especially into the close.

The 2 most obvious sources of resistance that have concerned me are trend-lines and major Fibonacci retracement targets. By yesterday, all but the cash 30's had penetrated their trend-lines on a closing basis and this morning, the 30's have broken theirs as well and while trend-lines have a habit of providing false signals, they can't be ignored for what they are; a sign that the previous trends have been altered. As far as the retracement targets go, as of this morning, only the cash 10's have failed to exceed their 38% retracement targets of the move from 3/18 which is the move that I think this rally is correcting. Should the rally extend from here, then 50% corrections will become likely and those are about 1 1/2 points away in the 30's and just over a point away in the 10's. The cash markets are just over 15 bps from the 50% targets but the cash 10's are the one 'lagging indicator' as they have yet to break out through the 38% target at 3.422 which happens to be the one target that I thought was the most important. With the other 3 having already exceeded their equivalents, it would seem that the cash 10's would certainly follow suit but there are reasons why I viewed that target as the most important. For starters, the retracements in the futures are not as reliable as cash since they are calculated from an extreme on 3/18 at which time these current contracts were not front month and therefore, less dependable from the standpoint of technical analysis. As far as the 30-year cash charts go, I always place them second to the 10's with regards to technical signals so at the end of the day, I want to see the 10's take out 3.422 and so far, the low yield there is .... 3.428. I had mentioned in a previous update that along with 3.42, I were watching 117-17+ as an extreme target for futures and so far today, that is the exact high so it is fair to say that we have stretched this rubber band about as far as it can be stretched without snapping.

The markets got terribly oversold at the lows and there was reason to expect a rally based on timing but the push we got yesterday that helped to overcome much of the resistance that had us concerned, was mostly the product of a weakening stock market. When I posted the above mentioned extremes for the 10-year in Monday's update, I also mentioned the mid-870's as a crucial level in the SPX and yesterday, that index traded just under 880, extending the decline from 7/1 to 50 points. Like the 10-year, that market seems to be at a make it or break it point. What happens from here is huge. Based on existing patterns, I suspect that while that market is headed lower, it may well find support at this obvious area and correct back up which could serve to attract sellers in fixed income but from right here and right now, it is little more than guess work. If you look at a longer-term chart of stocks that takes you back prior to October, you can see a potential 'head and shoulders' bottom being formed that would project the SPX down towards the mid 700's to complete the pattern before another dynamic rally would commence and at the same time, a picture of that index from May forward shows a possible 'head and shoulders' top that may or may not need any more work before projecting prices sharply lower from here. These pictures will clear up in the days and weeks ahead but the action from right where we are now, will be most important to both markets.

In addition to a faltering stock market, for the past several days there were other signs of a major change in market sentiment. Commodity markets led by Crude Oil have come under severe selling pressure as well, not unlike what they did last winter when stocks and interest rates were in free- fall. In many respects, this seems like a test of all that has happened since the bottom in stocks back in March an of course, the top in bonds during the same time frame.

Volume and Open Interest are still unimpressive in the bond market but all that can change if we can extend the rally from here. There will be a better place to get aggressive on the buy side and it isn't very far away; just not here. We can continue to move our stop up with the improving market and for now, a break below 117-02 will be the first sign of a problem with 116-18 being the more important indication that we may have finished off at least the A-wave of our correction. 

7/06/09 - 9:00 a.m. - The 10's and 30's are both coming off strong weekly closes and while on daily charts, they both managed to better long-term trend-lines on Thursday's close, when those same lines are drawn on weekly charts, they actually have held by the slimmest of margins. The 10's still need to clear 3.478 on a closing basis and there is also a channel line that appears to be very significant on the 30-year chart that crosses today at about 4.285. All told, I would like to see these markets extend the rally early this week, otherwise they may be in for a sharp pull-back. There are several things that are working for them, which include well-timed lows last month that should hold for considerably longer and now, a faltering stock market that is rapidly approaching what is probably very important support. But as is always the case, there are 2 sides to the story and bears have their ammunition as well, headed up by what is still a considerable amount of strong resistance in this area that has been influencing the fixed income markets for the past several weeks, as well as what are becoming some very over-bought oscillators. One favorite of most technicians, the Stochastic, when applied to a daily chart of the 10's, reveals overbought levels not seen since December. The longer-term picture is considerably less a concern as there, we are just beginning to alleviate oversold conditions but the daily charts are important and when you couple the overbought indicators with nearby resistance, they seem to add up to at the very least, a pull-back. Should the stocks get hit hard this week, the fixed income markets should be the beneficiary but absent some sort of surprise, we suspect that the areas above in the 10's represented by 117-17+ in futures and 3.42 in cash at the extremes, will be very difficult to overcome without some sort of backing and filling first. Should the markets experience a break from about where they are trading, the challenge will be to determine whether this represents the top of the A-wave of an ongoing ABC corrective rally - or whether it represents the top of the entire correction. For now it is just too soon to know but forced to make a call, we suspect the more compelling evidence points to the correction lasting several weeks longer in a worse case scenario.

Since the stocks may hold a key to the fixed income in this area, it is probably worth noting what is happening there. The SPX, after faltering from 956 on June 11th - the same day the fixed income markets bottomed - sold off to just under 890 and then rallied back a near perfect 62% before turning down again, thanks mostly to Thursday's jobs report. The pull-back there is already the largest since the March bottom and the most obvious support comes in around 875, where that index made a stand back in May. Should that area be broken, then there is a wave equality target near 864 followed by a retracement objective at 845 and then not much of anything until 811. Since early May, the SPX chart are reflecting what could prove to be a 'head and shoulders' topping pattern and while those are highly unreliable, still the stocks are likely to be tested in here pretty soon and while daily oscillators in stocks are fairly neutral right now, those on the weekly charts have reached overbought levels not seen since prior to the all-time top back in fall of 2007. While the 'summer doldrums' are known for what are frequently a lack of features in the markets, this summer seems to be setting up for something quite different. I have long since felt that the fixed income markets were about to rally in what I suspect will be a several-month long 4th-wave correction before heading back down in price, should the stocks begin a really meaningful decline, then the fixed income markets may be in for a better rally than what I have anticipated. For now though, I'm still thinking correction to near either 3.42 or 3.25 before a resumption of the bear trend.

For the next several sessions, the keys to watch will be the resistance in the 10's that only comes to an end in the upper 117's and the very low 3.40's, as well as the support in the SPX in the mid 870's. The 30's do have good resistance that extends at least another 25bps but still, the single most important level in fixed income from my perspective is the 3.42 area in cash 10's and that will be my 'bogey' for projecting further upside. 

7/02/09 - 9:00 a.m. - The employment report came in neither as bad as what we became accustomed to several months ago, nor as 'good' - and I use that term loosely - as what we got last month. Expecting to see the economy lose about 370,000 jobs, it lost nearly 470,000 while the unemployment rate inched 1/10th closer to 10%, although most surveys were expecting a 2/10th's bump. So based on these numbers, the recovery is right about where one might expect it to be; better off than what some think and not as bad as what others think. That leaves us with the chart patterns to go by and while never irrefutable, with each passing day they seem to be getting clearer - at least with regards to wave patterns.

Following several days of extreme volatility, todays news helps to finish off a week that has seen the 10-year make 4 price swings of close to a point each, and yet as I write this report, we are trading exactly where we closed on Friday. While not impossible, it is increasingly difficult to label the rally off the bottom as anything other than a 3-wave advance and that would place us in either the A-wave of a correction that should be followed by a B-wave that carries us back to at least the low 114's, otherwise we are likely already in the C-wave. Three wave moves are never easy ones to dissect. Additionally, if this is the 4th wave correction that I have anticipated, then it should last in the neighborhood of 5-8 weeks and Monday begins week 4, so the likelihood is that we are either very near the top of the first rally, or fairly well along the path to the final high. As far as targets go, using cash charts, the 2 best areas at which the rally could be expected to end are, basis the 10's, near 3.42 and again near 3.25. In either scenario, given the number of willing sellers that have surfaced since the bottom so far, it seems likely that the 3.42 area will attract some interest so a good bet would be to see better levels next week, but near 3.42, expect to see at least a significant pull-back. The pattern of any such break will tell the tale. A 3-wave decline from any high says that high will not hold. A 5-wave break opens the door for a possible top.

Given my preferred wave count that calls for a top soon, followed by the continuation of the bear market that began in December, it seems like a good time to address one thing that disturbs me with regards to this count. Since 2003, June has produced yearly extremes in the 10's every year and if that pattern were to continue, then the notion that we are in a 4th wave correction would seem to be wrong since there is just no logical way that this 4th wave would persist throughout the remainder of the year. And make no mistake about it, the reversal out of June is a substantial one, so much so that when view on a monthly chart, it reflects a 'doji', one of the strongest reversal patterns that one can find using candlestick charts. This seems to suggest one of 3 things; either I am incorrect about the fact that we are impulsing up in yield in a bear market, or the pattern of yearly extremes being seen in June is going to come to an end, or - and this may be my preferred guess for now - that we will see this corrective rally come to an end in the coming weeks near either 3.42 or 3.25, and it will be followed by what Elliott calls a '5th wave failure' meaning that the final impulse wave of the sequence that began in December, will test the 3rd wave yield crest of 4%, but fail to exceed it. Basically, we would make a double top against 4%. While I may be getting ahead of myself, I thought it a good idea to address this now as a means of having some yardsticks to measure against going forward.

We will in all probability have a very strong weekly close, possibly one that exceeds important trend-lines in both the 10's and the 30's. That suggests to me that we will see better levels next week and I will be looking for a reversal from somewhere very close to 3.42. As mentioned above, the structure of any such reversal will be the key going forward. Should we in fact close through the aforementioned trend-lines at 3.512 in the 10's and 4.357 in the 30's, and then push through 4.40 next week, an accelerated burst below 3.30 can be expected but it will take more than that before I would throw in the towel on the bear market rally theory. 

For the rest of today, I view the area of 117-00 to 117-06 as a likely extreme on the upside while I would also use 116-12 as a stop on an long trades.

7/01/09 - 9:00 a.m. - In many respects, today is all about tomorrow. For months, we got used to seeing the NFP number showing 500,000+ jobs lost and then last month, seemingly out of nowhere, that number came in at a 'paltry' -345,000 and now we head into tomorrow with market expectations set at -363,000. If last months number was a fluke, as the number then verses the expectations would have suggested, then we could get a really bullish surprise tomorrow. On the other hand, if the recovery is chugging along at a faster pace than most had expected... well, let's just wait and see how things play out. Today's ADP release came in at -473,000 while the expectations were for -394,000. With an early release of the number and a long weekend ahead, the reaction could be one of excessive volatility.

In Friday's update, we talked about the 2 most likely wave patterns that were developing based on the apparent 3-wave rally off the bottom and how either of them could be expected to produce a choppy recovery rally. Yesterday and the early trade today certainly support that theory as the 10's fell a point from the highs of Monday only to recover all but 3 ticks of the losses before heading south once again. This morning they have given back nearly all of the recovery. Some of these large swings can likely be attributed to thinner markets as we approach a holiday weekend but it remains a concern that when the markets achieved their best levels on Monday, the volume was the worst it has been in more than a month. Markets need to see volume support rallies and now, we can only wait to see if it improves next week and in which direction. For the record, the volume yesterday was much better than on Monday but then yesterday was a down day.

As we begin a new quarter, we get to look back and see how things went for the previous one and today we read that for quarter #2, the Dow advanced 11% while the SPX managed a 15.2% improvement with the other mover of notice being Crude Oil, which was up 41% for the quarter. These could all be viewed as positive economic signs but none more so than the 10-year yield which went from 2.685 on 3/31, to 3.523. Of course, this could be a function of inflation fears but once again yesterday, a member of the Fed, this time Janet Yellen, stated the view that inflation didn't seem to be an issue and she even mentioned 'deflation' once again in her comments. She voiced the concern that the Fed might tighten too quickly, choking off a recovery as in her words, the economy was "like a patient in intensive care whose condition has stabilized and whose fever is just starting to come down'. She views the recovery as 'likely being long and painful'.

The recent uptick in mortgage rates clearly contributed to the drop of 19% in mortgage apps last week, the biggest drop since February. The refi-guage fell 30%. Should the numbers tomorrow not support a rally in fixed income, the Fed will have their hands full with regards to holding down lending rates and thereby keeping any potential recovery on a roll.

So here we are, having rallied hard out of mid-June and into major resistance across the board and right in front of the jobs data. The 10-year futures have recovered 50% of ground lost since the May 14th and with 2 nearly equal rallies, both of which set up a potential break to new lows. The cash 10's have come within just a few bps of the 38% retracement target of the entire move from 3/18 and at the same time, they have nailed the trend-line drawn off the 3/18 yield trough. The cash 30's actually touched a trend-line drawn off the December, all-time yield trough. This is why we viewed this area as so important. Timing suggests further improvement but without the help of a good number tomorrow, the choppy corrective action will likely only get worst and that assumes that we are still, in fact, correcting. Our two preferred wave counts are still intact but they can remain intact even if we go back and test the lows so this is no place to get too comfortable.

Wave patterns since the lows suggest that we can all but rule out a 'zig-zag' correction, the kind of correction that is orderly and the most powerful. The two most likely patterns remain what they were last week' either a 'flat' or a 'triangle'. In either of the latter options, once the first leg or the A-wave has ended, we can expect to see the markets give back well over half of any gains achieved since the June lows and probably more than 3/4's of them. A strong enough rally could give us reason to re-think what this pattern really is but for now, we can only go with the picture already being painted and this is no place to stick your neck out.