^_Tbondtrader

11/30/10 – 8:15 – Today the March contracts become front-month so we’ll obviously be watching new numbers for support and resistance levels. It is particularly troublesome for analysis of the 30-year since the March contract shows no trades prior to mid-June and not much trading until September. The 10-year at least shows trades back to the bottom in April even if the trading was extremely thin until September so at least one can see the entire rally and work with Fibonacci retracements, Gann angles or any other technical tools that utilize entire price swings but the point to be taken from all of this is just how important yield charts are, especially for long-term analysis and during times of contract rolls. With that caveat out of the way, yesterday the 10-year failed right up against my suggested sell area of 124-31, which was nothing more than the 50% retracement of the break from the high on 11/23 to the lows made last week. That made it the perfect secondary fail point if that 11/23 high represented the end of a corrective rally. The December 10’s broke from 124-31 down to 18 before recovering most of the ground lost before the close so it seemed like that high wouldn’t hold but as of the close, it still had. This morning the treasury markets have all caught a nice bid which has carried them well above yesterday’s highs, targeting last week’s best levels. The March contract has a very similar look to the December contract although the low made last week was 6 ticks above the low made on the 18^thand not a perfect double bottom.  That allows for a slightly better upside target. The 50% correction of the bigger decline, the one off of the November 4^th top, comes in at 125-04+ on the March contract while a wave equality target for a C-wave rally would be at 125-02+ so now that figures to be a solid target area. There is a gap left from last week that runs from 124-05+ to 124-11+ and currently the 10’s are trading right in the middle of so if they can retain this bid for another half hour, there will be an island reversal – again. Overcome the gap and that 125-02+/04+ target looks like the next stop. If talking about multiple 50% corrections is confusing, hopefully I’ll clear things up with the chart below. The cash 10’s closed right up against their gap as well so it does look like we will be dealing with an island there, at least in the early trade. Islands or no islands, I view this rally as one to sell based on all that I look at with the only caveat being the one we have no control over – unemployment.     

Since I couldn’t tell yesterday if the 10-year futures were in a very minor upside correction of the decline from the highs made last week, or if they were still in a larger upside correction that began at the lows made on the 18^th, it figured to be a good time to take a look at charts of the 30-year as well as the cash markets. The first thing I noticed was that the 30-year cash bond had traded through the yield trough made last week, the same extreme from which the 10’s had only recovered 50%. The 30-year futures didn’t take out the equivalent high but did come within 25% of it. Those 2 charts offered strong clues that yesterday’s highs wouldn’t hold. The cash 10-year looked like the futures except that yesterday it twice tested the 62% correction of the break from last week. For the record, the 5-year had made the shallowest correction, recovering just over 38% of the recent decline but still less than 50. So what I was left with was a picture that could have still turned into a worst case scenario based on the 5’s and 10’s but not so with at least the cash 30’s. The only way that all three maturities could have been in the same minor degree wave pattern was if the rally that began late last week was to be the larger C-wave of a correction that began on the 18^th with targets back near the highs made early last week. The fact that today will begin with an upside gap only goes to enhance the targets that are still a good ways off.

 Other markets:  The S&P posted its low for the day at 10:06 yesterday morning, down 16 points for the day. An hour and 48 minutes later it tested the low but held 1¼ points above it but that rally failed to exceed the previous one and a 3^rd decline commenced that ended an hour and 46 minutes after the previous one. Can you say the word ‘cycle’? From that low the market took off, rallying about 15 points but a late break produced a slightly lower close. Still, it was a decent finish to the day considering how things looked just a few hours earlier. The low was higher than was the low on 11/16 so to me, it still looks to be in a sideways correction from that low. The volume measured in the futures markets was the highest since the 15^th and while the close may have been mixed, the majority of the volume came on higher hourly bars. I’m not sure exactly how to interpret that but I don’t think that it was clearly good or bad. I’ll stick with the notion that there is still a risk of a hard break to the downside to complete a correction from the highs made in early November but I’ll also stick with the notion that those highs will ultimately be exceeded.

Crude Oil and the CRB had strong up days and are flirting with the area that would turn them back if the potential ‘head and shoulders’ top from October that I have eluded to is to prove real. If they don’t fail very quickly they will have overcome that potentially bearish pattern and that could mean they have further to rally. Gold had an inside up day which to me means very little. I do think these markets will show their true colors this week. In my opinion, the Dollars showed its true colors on Friday and yesterday the rally extended nearly half a percent. The close there was 80.79 after making a high at 81.14 and the first resistance I see is at 81.44 but as far as objectives for the move go, I think that they are a long way off.    

Chart for the Day:  I could post any number of charts showing potential wave counts but it would only go to confuse the issue. Instead, I am just going to post one, a chart of the March 10-year futures with objectives drawn on them for either of the 2 preferred counts that I was watching yesterday. Obviously the more negative of the 2 has now been eliminated but I have left it on the chart anyway. In yellow you can see the 50 and 62% retracement targets for the entire decline off of the November top. If the 10’s are in the C-wave of a correction that began on the 18^th, which they do appear to be, those would be the prime targets. In magenta I have included the wave-equality target which, as you can see, is very consistent with the 50% retracement and as you probably already know, is one of my favorite tools to use. In white I have drawn the 50 and 62% retracements of the decline from the highs made last week that held us back yesterday but do so no longer, while the cyan ellipse shows the area of the gap left on the 24^th that is being challenged right now. What all of this tells me now is that if the 10’s can exceed the gap at 124-11+, I would expect to see a move to at least 125-02+/04+ and if all looks good on the way there, that could be a great place to be a seller based on current wave patterns.

Summary:  This morning may be tricky but that 124-11+ gap fill area could attract sellers. I don’t currently think it will stop the rally but it could slow it down for sure. It might pay to start the day with a 9-tick trailing stop and in all honesty, that may be the best plan for the entire day. The rally already looks corrective and a trade back below 124-01 would only go to enhance that look so I am not about to become a bull, but I do think the rally can extend towards 125. A trade back below 124-01 would also fill the opening gap so that does seem to be a good ‘uncle point’ for any bulls. The only place that I would be an outright seller would be against secondary resistance at 124-28.

When I look back at a weekly chart of the 10-year, not only do I see that the volume was off from the previous week but 2 weeks ago the range was 124-01+ to 125-30 with a close at 16+ while last week it was 125-01+ to 125-27+ with a close at 19. For all intents and purposes last week might just as well have never happened; at least as far as patterns in the 10’s are concerned. But that having been said, last week did happen so let’s take a look at some of the indicators. Starting with the weekly charts I see that oscillators like the traditional RSI, Slow Stochastic and MACD are all pointed down and all with bearish divergences at the highs; my Cycle Stochastic being the only one that has reached into oversold territory. The Price Proxy directional indicator remains in a ‘sell’ mode from a turn 2 weeks ago – the first since late April. There’s just nothing about any of those indicators that can be interpreted as friendly. When I look at the same setup on a daily chart, the picture is quite different. There the RSI is low though not oversold while the Slow Stochastic has just reached oversold but is still pointed down and obviously with no divergence. The MACD is negative and pointed down as is the Price Proxy. My Cycle Stochastic has actually turned up from oversold and does show a bullish divergence at the lows so it stands alone as the one indictor suggesting some sort of a recovery from right here. I think that if you take all of the indicators just mentioned they seem to collectively be saying that the markets have further to go on the downside longer-term based on the weekly charts although a corrective rally may soon develop based on the dailies. That is pretty much what my wave analysis is telling me as well. Minor C-wave rally or not, I would look for lower lows as early as this week and no later than next.

Other markets:  The S&P had a fairly ugly day on Friday but on such poor volume I wouldn’t want to read too much into it. Volume for the entire week in the S&P futures was not much more than half that of the previous week. I still think that stocks have been in a minor upside correction since the lows on 11/16, within a larger downside correction that began at the highs made on 11/05. I look for a secondary break that could see prices head down towards a solid support zone in the 1050’s. At this point though, I don’t view the stocks as in any new bear market move but rather I suspect this will prove to be a larger degree downside correction prior to still higher highs. When I say that, however, I find myself cringing since the better approach when expecting a break of as much as 30 S&P points is to wait it out and see if the bigger pattern is corrective or impulsive. Let’s just say I’m short-term defensive.

Gold closed down about $10 on Friday but that was $13 off the lows. It was a higher weekly close and while I’m not sold on any particular wave count, there is a solid resistance about $20 to $25 above Friday’s close -  $1383 to $1388 - and until that area is overcome I do think that gold will remain vulnerable to a break down towards $1300 - $60+ below Friday’s close. Gold, as well as Crude Oil and even the CRB Index have potential ‘head and shoulder’ tops being formed since October and need to be monitored for just that so rather than make any more guesses right now, I want to get into this week and see if I can get a better read on the wave structure of the rally that began just over a week ago.

The Dollar does merit more of a mention from my perspective. By virtue of having exceeded the August low at 80.08, it has pretty much confirmed a 3-wave decline from the top made in June. That tells me we are in for a rally that even in a worst case scenario would seem to have targets near 88 – up about 10% from current levels. To be sure there will be resistance to overcome, especially near the August highs just below 84 and in fact, the high on Friday at 80.52 was a near perfect hit of the 62% retracement of the decline from the August high at 80.53, but the bigger patterns tells me we won’t fail from there even if a pull-back does develop. I can’t say what a strong dollar would mean to the other financial markets but I do think that the underlying trend will be up for a while.  

Chart for the Day:  I thought I would post a weekly chart of the 10-year with the above mentioned indicators on it. As we move through this week, I’m sure I’ll be posting shorter-term charts, probably with wave counts on them, but the weekly charts do matter and serve to keep one from ‘not seeing the forest for the trees’. I’ve included a vertical line drawn through the week of the high so as to make it easier to see the bearish divergences that have developed. This chart is telling us to be defensive.

 <chart>

11/26/10 – 8:15 – The markets are in a recovery mode this morning but it remains to be seen if there will be any volume to today’s trade at all and if a rally does develop, I think it will be nothing more than a minor degree b-wave which optimistically would have targets near Wednesday’s highs. All things considered, I don’ think the early part of the week could have gone much worse for the bulls. It’s true that there are still some potentially bullish interpretations of the wave structure but the rally early in the week, as strong as it seemed, did nothing to disturb any of the bearish patterns on any of my charts and things ended on Wednesday worse than they started on Monday. While Tuesday’s upside gaps left island reversals below on several of my charts, I didn’t think that they could be trusted given that the closes were worse than the openings and that proved to be correct as they were erased in spades on Wednesday and with downside gaps that left islands below that appeared much more impressive. In the case of 5-year yields, after bottoming out at 1.01 in early November, they reached 1.561 last week and then retraced a perfect 38% of the move down to the 3^rd decimal point before gapping up in yield on Wednesday, not only leaving an island below but posting new high yields of the entire move. With a close at 1.558, they were about 13 bps from their 38% bull market retracement level but they also now have a wave equality target at 1.69 which is uncommonly consistent with the 50% correction of the entire bull market out of the April yield crest which is at 1.681. I do see some support at 1.612 but suspect at best only a bounce will develop from there. Given that the rally in the cash 10’s was clearly corrective, it seems likely that my previous 2.97 barrier will not hold up and I continue to believe that once it gives way there is little in the way of true support this side of 3.06 followed by 3.12. I don’t see much support in the futures below the 11/18 lows at 124-01+ before the September lows at 122-29+ get tested with the 38% retracement target all the way down at 121-22+. I think the odds are pretty slim that we will see that area while the December contract is still the active one but a wave-equality target exists at 121-28 and to me, that makes a move of that magnitude seem fairly likely regardless of which contract is lead at the time. The 30-year cash and futures charts are markedly different from one another but both seem to suggest lower lows are on the way to finish an impulse that began on 10/06 and in the case of the cash market, any new high yields would only likely end only the 3^rd wave off of the yield trough made back in August and not the bigger impulse wave. I think that technical market forecasting is all about probabilities and I think that the probabilities are that rates are still headed higher – maybe much higher.

Entering this week the wave patterns suggested a corrective rally was likely and the fact that it was a holiday shortened week with the likelihood of declining volume made the notion of a counter-trend move seem all the more likely. That is exactly what we got and even with the added advantage of an apparent strong technical foundation based on the upside gaps left on Tuesday, Wednesday proved to be a disaster. Factoring in that North and South Korea were actually shooting at each other and yet there was no ‘flight’ into treasuries and I think it’s fair to say that most everything seems to be supporting the bearish trade over the bullish one. Volume during Wednesday’s bloodbath exceeded that during Tuesday’s rally even though it was the day before Thanksgiving and that too is decidedly negative. I could go on and on but why bother. Today figures to be a low volume day so I don’t know what to expect but now we are very close to making new lows of the move in the 10 and 30-year futures as well as the 10-year cash and once that happens, there could be some serious capitulation. As soon as I can find something positive to point to I will but wave patterns, volume patterns, my Price Proxy directional indicator on both daily and weekly charts and a whole lot more are telling me to look out and “I calls em as I sees em”.

Other markets:  The stock market made an impressive recovery from Tuesday’s crush but the truth is that it came on very, very low volume and this morning the futures are under heavy selling pressure once again. It appears that the action from the lows last week through the highs on Wednesday – or last night if you care to look at overnight trades – represented a ‘flat’ correction and a secondary decline may have begun. I had mentioned on Tuesday and again on Wednesday that trades into the 1150 area seemed likely and I still feel that way but like in treasuries, today figures to be one with little volume so I don’t want to read too much into the early weakness. The CRB and Crude had strong up days on Wednesday while Gold did little but the Dollar Index, which had hit its highs before my report went out on Wednesday at 80.00, has extended that rally this morning to well beyond my 80.08 ‘bear market uncle trade’ and while I will go into more detail on Monday, let’s just say that I wouldn’t be too bearish the Dollar for a while now.  

 Charts for the Day:  I thought I’d post a chart of 5-year yields since it seems to be telling the most compelling story for higher rates sooner rather than later. This chart could be put in any Elliott Wave Theory book as it displays a near perfect depiction of an impulse wave followed by a ‘flat’ correction. Wave theory states that 2 of the 3 waves in a 5-wave sequence tend to be equal or related by a Fibonacci ratio. In this case, wave-1 would have covered 33.7 bps while wave-3 covered 32.5. It also states that the 3^rd wave is frequently the biggest and most powerful but never the smallest. While wave-1 may be 1 bp larger, wave-3 contained the gap and clearly isn’t the smallest. The theory goes on to say that at the end of a 5-wave move, the correction can be expected to retrace a Fibonacci ratio of the advance and in this case the both the low yield of the pull-back and the 38% retracement of the rally were 1.345 shown here in blue. Finally, wave theory describes a ‘flat’ correction as one where the b-wave rally stops at the top of the 5^th wave before a c-wave decline carries back to the a-wave low and if that doesn’t hold, then look for the c-wave to be 1.618 times the a-wave. Both of those projections are shown here in magenta. As you can see, 1.618 times the a-wave came in at 1.351, missing the low by.006. With the new yield high made on Wednesday and a gap below it, the current move up in yields has all the look of a 3^rd wave or c-wave having already begun, the previous 5-wave move having been the 1^st wave or the a-wave.

 <chart>

Summary:  This I doubt there will be enough volume today to trust the trade one way or the other. I think I would be selling against the gap left on Wednesday with a buy stop just above it at 125-08+ but that is still a long way off and trailing the rally with a 9-tick stop may prove to be a better idea. I would have a sell stop at 124-15 and would be especially defensive if we close below there as that would represent a lower weekly close as well.

11/24/10 – 8:15 – What began as an explosive up day yesterday in treasuries with large gaps below, ended up to be just a higher day with the only gaps left being those in the cash 10’s and 5’s. The low tick in the 10-year futures perfectly filled the gap left from the 8:20 opening which could be interpreted as a good sign since buyers appeared to be waiting for the gap fill but with the closes being below the 8:20 openings and the gaps unable to hold in 3 of the 5 charts I monitor, I would read the day as only slightly better than neutral. This morning the markets are set to open lower and in fact, about where they were when they closed on Monday. It’s almost like yesterday never happened and the truth is that when this week has ended, we may wish that it never happened. Volume in the 10-year was good but with the close being below the middle of the range, one has to assume that a good deal of it came on the sell side. As far as price levels go, the 10-year futures traded above their 38% retracement of the entire decline but failed short of their 50% target so they clearly can still prove to be in a corrective rally. The 30-year futures, which seem to show only a 3 wave decline off the top as opposed to the 5-wave structure of the 10-year, failed nearly half a point shy of what one would have to call the wave-1 low at 129-18, which means this can still prove to have been just a 4^th wave corrective rally. The cash 10’s could be the most bullish looking chart short-term based on back to back gaps but they, too, failed to reach any pattern changing area and closed with a considerably higher yield than where they had opened. No pattern changing trades occurred in the cash 30’s either.  Perhaps the most interesting trade came in the cash 5-year which gapped open like the other treasuries and then perfectly touched its’ 38% retracement of the move up in yields from the November 1.01% trough before reversing to close near the worst levels of the day. When the markets open this morning, if the cash 10’s open with a yield higher than 2.787 and the 5’s open with a yield higher than 1.401, islands will be left from yesterday and that should be very troubling to any bulls if they are not erased by the close. The bottom line to all of this is that what could have been a real game changer of a day yesterday proved to be anything but that with no real assurances that the rally is either impulsive or corrective. I entered the day thinking corrective and I’m still there.  

Other markets:  Unlike the 2-sided trade in treasuries, the stocks opened weak and closed weaker. If the pre-holiday trade today - and even the post holiday trade on Friday - proves light and the SPX can hold the lows made last week at 1173, then they could still return to the interim highs at 1200 but the handwriting seems to be on the wall that a secondary decline awaits. I mentioned targets near 1150 in yesterday’s update and having looked a little closer at the chart, I really do like that area which is still nearly 30 points away. 38% of the rally out of the August lows at 1040 is retraced at 1155.50 while a wave equality target based on the recent action comes in at 1146. There were 3 swing lows in October at 1151+, 1155+ and 1159+ so the entire area should be attractive to a wide variety of technical buying.

Gold, Crude and the CRB all traded lower before recovering, showing me little worth mentioning. Not so for the Dollar Index though which made new highs of the move with a 1.33% rally carrying it slightly through the 50% correction of the recent bear market. The close was 79.69, just 39 ticks from the game changing number there that I highlighted in yesterday’s update at 80.08.

 Charts for the Day:  No charts for today.

Summary:  This figures to be less than a memorable day. If anything I think it could contribute to the bearish case. If the markets soften further before they open they could leave downside gaps and island reversals from yesterday in the case of the cash 5’s and 10’s. I wouldn’t be thinking along those lines had I not had a bearish bias coming into this week but the last think I would have wanted to see if I were a bull was a pre-holiday, light volume rally that failed to achieve any meaningful levels and so far that is exactly what we’ve seen. Whatever action we are going to see figures to come early and I wouldn’t want to wait too long to make whatever moves I wanted to make.  Had the 10’s been set to open unchanged I would have used at trade just under 125-04 as my sell-stop but right now that figures to be jumped on the opening. Next stop for me would be 124-22 and that is more room that I would want to give long exposure but other than flee on the opening, I don’t know what else to do. I might start the day with 125-18 as my sell area but on any trade below 125, I doubt we’ll see a recovery any better than the top of the opening gap which would be at 125-07+. I still don’t care for these markets.

11/23/10 – 8:15 – Finally some real fireworks from the overnight trade. The S&P futures are off 14 points and the treasures, both 10’s and 30’s, are up nearly half a point. The 10-year has been as high as 125-27+ which would be up about ¾‘s of a point and nearly to its’ 50% retracement level at 126-01+ which centers a band of resistance that I see from 125-30+ to 126-02+. I wouldn’t go so far as to say that a trade above there would confirm the end of a corrective pull-back since I still don’t like how the other charts look but it would clearly be a good start. As far as the S&P goes, it now appears likely that from the highs from about 2 weeks ago, we have seen an A-wave down and a B-wave back up and may be entering into a C-wave decline for which I have a very good target area near 1151/52. I’ll get into some detail on that target area in tomorrow’s report but for now let’s just say that stocks seem to have more downside and if that proves to be correct, it may throw a monkey wrench into my more bearish bond counts. We’re not there yet, though.

A good extension of the rally yesterday had pushed the 10-year beyond my first objective and carried the 30-year right to my secondary objective. The cash 10’s, with a low yield at 2.798, basically nailed the 2.80 resistance I had mentioned yesterday while the cash 30’s pushed a little through theirs. Everything still looked ‘ok’ for a bit higher based on wave structure but with several very good levels having been smacked, I wasn’t convinced that I wouldn’t awaken to downside gaps but just the opposite is the case. At the best levels of the day yesterday, the cash 10’s narrowed the gap they had left on 11/15 which was one of the reasons I liked that area, but they couldn’t quite fill it and now they will open with that gap and an island below which could prove meaningful in the days ahead. That gap fill would have been at 2.776 while the 38% retracement of the most recent impulse came in at 2.771 so that area figured to be one that would attract a lot of selling but now the 50% correction at 2.712 becomes a good target and for an entirely different reason, a trade there would disrupt the most bearish interpretation of that chart. It would take a trade back through 2.60 to destroy it but by then the handwriting could be on the wall. To erase what will now appear to be an island reversal, the 10’s will need to trade back through 2.798. The treasury markets had softened on Sunday night and with the rally yesterday, the 10-year futures produced an outside up day on the which is always a bullish indicator and in this case, it came on the one chart that I thought still had a chance to lead the others out of these lows. I didn’t like the idea but it remains the one chart that stood to disrupt the bearishness of all the others.  

For such a strong day, volume was not all that great. It was an improvement over Friday’s but that didn’t take much as it was still well below the 50-day average and that continues cast a cloud over this rally. With such a strong opening today, the volume should show a burst and if it does, it will make the close all the more important. Reversals are clearly a possibility but so too is an extension, especially if the equities fail to hold the lows made last week. One thing that I haven’t mentioned in a while is open interest which had dropped nearly 200,000 contracts since the top. That is a friendly pattern suggesting that the selling has been long liquidation and not new short-selling which can set the stage for another round of buying by the very ones who were ‘pushed out’. It doesn’t have to work out that way but it is how a corrective decline should look. Looking at my cycle stochastic on the 10-year futures, while not absolutely positive, I think the reading at yesterday’s close was the lowest it has been since the summer of 2007. That’s really difficult to understand since the 10’s had closed higher but that’s what it says and that seemed to be begging for a rally. Now we seem to have a good start for one but with critical levels being approached and today could tell us a lot about the future health of these markets. If the markets remain strong today but the volume does not pick up, we have to consider the possibility that we are looking at an exaggerated move based on thin, pre-holiday trading but I do think that the patterns are reaching a point of ‘critical mass’ and must be respected if key levels are exceeded in either direction. More on those in a minute.

Other markets:  The equities closed mixed yesterday, having made lows early and highs late, which left them with what appeared to be a sideways correction following the rally off of the lows made last week. That seemed to point them higher but this morning appears to have thrown water on that fire. I have felt for several days that the decline looked corrective but with no conviction that it was a completed correction and now it appears that it may have been just the A-wave of an unfolding ABC. Volume in stocks yesterday was a little more impressive than it was in bonds but with a nearly unchanged close, that really didn’t tell us much. I’m still struggling for a good count on my longer-term SPX chart but everything still seems to be pointing to eventual higher highs.

Other than an outside up day in the Dollar Index, the other markets were all pretty much featureless to me and I’ll defer commenting on them for another day or so. The rally in the Dollar was pretty impressive though and certainly leaves the door open for a potential pattern changing trade if it can clear the August lows at 80.08. Last week’s high was 79.46 with a 50% retracement number at 79.60. Any new swing high now would seem to have a good chance of exceeding 79.60 and that would put that 80.08 square in the crosshairs.

Charts for the Day:  Even with the strong rally in treasuries yesterday, I saw nothing much to show in my charts and with this unexpected strength this morning, I’ll wait to see how today unfolds before I update them for you. I thought today I would post a few charts of the Dollar Index so that you can see what has caught my attention in that market. The first is a monthly chart which shows the massive decline that began in early 2002. It bottomed in early 2008 and it is the pattern since then that I am most concerned with. The blue line on this chart was actually drawn on the weekly chart that will follow but I left it on this one just because of how well it caught that bottom made in late 2004. That is not where it is drawn from, however. Anyway, this charts show me a market that may or may not be correcting from its all-time low made in late 2008. If it has been a correction and the correction has ended, then we would have begun an impulse wave in June of this year. If that’s not the case, then the most bearish alternative I see would likely be a triangle meaning the Index would be headed back to the overhead, red line – a significant rally.

 <chart>

The second is a weekly chart of the Index going back into 2008. The blue line that was visible on the monthly chart above was actually drawn on this chart under the low at 80.08 made the week of 8/06/2010. If the Dollar is in an impulse wave from the high in June with new lows below those made early 2008 as an objective, then the decline should be a 5-wave move and we would have likely seen waves 1, 2 and 3 already but if it goes above 80.08, then this rally cannot be a 4^th wave rally since that would place it back inside of the 1^st wave - unacceptable in an impulse wave. The bear market scenario would seem to be gone for now if that level is exceeded. You might also notice that I have put the Price Proxy on both charts just for your enjoyment.

 <chart>

Summary:  The rally today can be a game changer or just an opportunity to unload bonds in front of a holiday and the next push to new lows. I would be a seller against the 125-30+/02+ resistance area but if the sell was to initiate a new short, I wouldn’t give the markets more than a few ticks above there without taking my lumps. I don’t know where a sell-stop could be sensibly placed above 125-07 other than to trail the market with a 9-tick stop.

No time to review this one so forgive any typos.

11/22/10 – 8:15 – Friday was generally an up day in the treasuries although only the 30-year futures made any real progress. Still, that fits with my preferred short-term wave count which labels Thursday’s low a B-wave with a C-wave rally back to last week’s highs likely before we see another new low. I like targets for this rally beginning around 125 in the 10’s and just above 128 in the 30’s with potential secondary targets near the 125-18 gap in the 10’s and 128-12ish in the 30’s. The cash levels I’d be watching for are near 2.80 in the 10’s and 4.19 in the 30’s. Volume on Friday was horrible which is not all that uncommon on a Friday but it is also what one might expect to see during a C-wave since both imply that the move will fail. I had suggested on Friday that I expected to see new lows by today or Tuesday but the way things are playing out I’m guessing I’ll need to give the markets a little more time. Not much though as for now, the best alternate count for what I believe to be a corrective rally that began last would seem to be a triangle which fits if I have the larger wave count correct but it would only go to delay the next break by a few days. We’ll see how this plays out but for now, I don’t expect to see last week’s lows make it through next week.  Remember.

If you follow these reports on any regular basis you should know that I have some mixed feelings about just what the decline that began on 11/04 really is. I think the bigger picture is more negative than positive based mostly on longer-term wave patterns and on all but the 10-year futures chart which can still be interpreted to go either way with about equal probabilities. I do think that the patterns will be resolved very soon though. If my short-term count is correct, then a rally should develop within about a week and the form that it takes will tell me more than anything else. A choppy rally says we are ultimately headed lower and perhaps much lower while the bullish count would require an impulsive rally to develop. I think a little patience in here could pay off big time.

One thing not to lose sight of is the fact that this is a holiday-shortened week and one that is likely to see a serious tail off in volume.  Basic technical analysis teaches that a strong trend needs to be supported by volume and I’ve always liked to reverse engineer that notion by anticipating counter-trend moves when I can anticipate light volume. That would tell me to anticipate a bounce this week since the bigger trend has clearly been down. Looking at a weekly chart I can see that the volume last week was the highest since the late August top so that would seem to suggest that the lows have yet to be seen. Oscillators on the weekly chart are pointing down as well though none that I see are really oversold just yet and that too seems to be a negative. When I shift to a daily chart, as mentioned above I see that volume during Friday’s rally was abysmal so that is consistent with the idea that this bounce will fail as well and while the daily oscillators are all at very low levels and mostly oversold, there are no divergences as of yet to generate any sort of a buy signal. Finally, the Price Proxy on the weekly chart has turned down for the first time since just after the April bottom. It is true that it is a trend-following indicator but one that is very sensitive and turns quickly and given the performance since April, it isn’t one that I would be quick to ignore. Everything seems to be telling me to be on the defensive at least until I can find some indication that a low may have been made.

Other markets:  The SPX is behaving pretty well by my standards even though I just can’t get comfortable with a wave count out of the August lows. I don’t see how the decline from the highs made on 11/05 can be interpreted as anything but corrective though, so I’m still expecting higher highs. The next day or so should allow for a read on the bounce/rally that has developed from last week and that will help determine if it is impulsive or just a B-wave. For the week, the SPX was unchanged with most oscillators at fairly elevated levels although my cycle stochastic is not far from registering oversold readings. The biggest negative I see is that the last 3 days of last week were all up days while the volume declined on each. While I still think higher highs are coming, this holiday week may prove to be a difficult read.

The Gold market broke below a good up-trend line last week before stabilizing and moving back up to the line but there are now 4 closes below it and I think that’s bad sign for the gold bugs. Crude Oil had a terrible week as well but the low did come right at what Elliott would call ‘the 4^th wave of a lesser degree’ meaning the 4^th wave low during the last impulse up. That is great wave-based target and it was also very close to the 50% retracement of the rally out of August. Of course with Gold and Crude have had such bad weeks it should be no surprise that the CRB did had one well. The low there has come through some Fibonacci targets but not made it to others, depending on which low you measure them from. My call is to measure from the August low and if you do that, the low is between 38 and 50% retracements but the decline is so impulsive looking that I think we need to see bounce develop followed by another break before any real bottom will be made. And then there’s the Dollar which had a surprisingly good rally early in the week but tailed off pretty hard late. It got one close above the major down-trend line before failing and the high was close to a 50% retracement target so that is a market that I think needs to be watched very closely. It doesn’t need a lot more upside to confirm a significant bottom but if it is to fail, last week’s highs were at a really good area from which such a failure could come.

Charts for the Day:  I’m going to post 2 charts today, a daily and a weekly of the 10-year futures with my cycle stochastic, a traditional stochastic, volume plotted below and my Price Proxy as an overlay on the chart. Those are the indicators I mentioned in the second paragraph so you can see for yourself what I am looking at. First is the weekly and below it is the daily. If you’ve read paragraph 2, then I don’t think they need any more commentary.

 <charts>

Summary:  The 10’s still have a gap from 124-20 to 23+ and I suspect there will be some sellers in that area. Still, I’m looking for a move close to 125 this week so I don’t want to be too quick to sell. Maybe lightening up any sort of long exposure in that area or taking partial shorts there makes sense but I wouldn’t get too aggressive just yet. I would use 124-06+ for my sell-stop.

11/19/10 – 8:15 – Following very soft openings yesterday, the treasuries found support near Tuesday’s lows and spent the rest of the day in a mild recovery mode. All closed lower but they also closed well off their lows. The 10-year futures made a new low of the move as did the cash 5-year but the 30-year futures, cash 10’s and cash 30’s did not and my guess is that yesterday will prove to have been the B-wave low of a correction that began on Tuesday and not any sort of terminal low. I suspect we’ll see new lows by Monday or Tuesday at the latest and if so, we’ll just have to see if they can hold my ‘critical’ support levels in cash at 2.975 and 4.419 in the 10’s and 30’s respectively. I’m not ruling out a corrective rally that lasts longer than just into early next week and in fact, that’s what I originally thought we would see following the reversals on Tuesday afternoon but given the trade from Tuesday through yesterday, it has all the look of small degree ABC correction and I think I’d look to be a seller around Wednesday’s best levels if I could be and see what happens.

Elliott describes a ‘flat correction’ as one whose A and B waves are 3 wave moves where the B-wave returns to where the correction began before the C-wave returns to the same spot as where the A-wave ended. With the near perfect double printed price low/yield high in the 30-year futures and 10-year cash, a slightly lower low in the 10-year futures and a slightly lower yield high in the 30-year cash, a ‘flat’ correction seems to be the best call - collectively speaking. Couple with that the fact that volume has declined over the past 3 days and most evidence still seems to point to an incomplete decline. One could draw a different conclusion if they were to rely on daily oscillators since the basic stochastic is oversold - though without divergence - while a 14-bar RSI is at the lowest level it has been at since near the April bottom. My cycle stochastic has the lowest reading it has had since February. I’m not a big fan of those indicators though and won’t let myself be too influenced by them when they are in conflict with my wave work. The Price Proxy is still in a sell mode on the daily chart and absent a recovery today, will go to a sell mode on the weekly chart for the first time since the end of April. That would suggest that whatever happens from these current levels, lower prices are still likely going forward. Aside from wave patterns, the thing that I want to be most mindful of has to do with the gaps left on Monday in the 10-year and the 5-year. Remember that having occurred on a Monday, they appear on the weekly charts and what I would want to watch out for, especially if I were short, would be a gap back over the same area and especially if it were to occur on Monday. That would leave an island reversal on both daily and weekly charts. It wouldn’t change the wave patterns but I would still not care to fight with that sort of a pattern. We’ll see how that goes on Monday but if we were to get closes near those gaps today, my advice is to be very careful with any positions over the weekend as Monday’s openings could make or break them. The gaps are at 125-18/18+ in 10-year futures, 2.802 to 2.776 in cash 10-year and 1.399 to 1.382 in the cash 5-year.

Other markets:  The SPX gapped up yesterday and stayed firm all day long but never really went anywhere after the opening. In one of the strangest days I can remember, an hourly chart of the S&P futures shows that the highs of the first 6 hourly bars were between 1198.25 and 1199. If you don’t know this, the minimum tick size is .25. To me the best feature of the chart is the fact that the decline from the highs made on 11/05 looks very corrective although I don’t yet see any evidence that it has ended. Volume was fair at best and I wouldn’t be surprised if we were to see a continued range-bound trade but unless something dramatic happens, I still would expect to see higher highs down the road.

I don’t see enough features in the other markets that I like to cover to warrant much more than just an update. Gold and Crude Oil both staged small recoveries dragging the CRB with them. The next few days should allow for a read on whether the recoveries are impulses that will carry those markets back to their highs or whether they are just bounces. I do like lower objectives in them so for now I’m guessing the declines are not over but that is just a guess at this point. The CRB, which closed at 302.51, needs only a close today above 303.60 to create upside reversals on the weekly chart. Gold would need a close above $1368, about $18 away. The Dollar Index, which closed above its’ downtrend line on Tuesday and came close to a 50% retracement target, dropped back below the trend-line on Wednesday and declined further yesterday. It closed yesterday at 78.81 and needs to remain above 78.08 to avoid a weekly reversal.

Chart for the Day:  Since I’ve often said that my market of choice for near-term wave analysis is the 10-year futures, I thought I might show the only 2 counts that I am currently considering. I see nothing in the chart of the 30-year cash that is encouraging and will only get friendly to the 10-year cash if it trades back through a 2.70 and perhaps not really until 2.60. Wave patterns could impact my opinion sooner but for now ‘it is what it is’. But as far as the 10-year futures are concerned, I think they can be interpreted as either having crested in November in a terminal wedge labeled here in black with an ‘ABCDE’, otherwise they likely made a high in October from which they have done an ABC irregular flat correction shown in red. The ‘irregular’ part has to do with the fact that a new high would have been made on the B-wave rally – not all that uncommon in wave work. If the ‘wedge’ is the correct call, then this recent decline, which now clearly looks to be a 5, would be only the first of at least 2 such declines and perhaps many more. If the ‘flat correction’ is the right call, then the recent 5-wave decline is the C-wave of the ‘flat’ and the correction is likely over with then next stop being new highs. The real ‘tell’ will come in the form of the structure of the next rally assuming that one develops. Three waves up and we’re headed much lower while 5 waves up could be the beginning of another bull market run. As I have repeated many times of late, all but this chart of the 10-year futures seem to be telling me the more bearish outcome is the one to expect and since this chart can be read either way, I’ll remain a bear until I come up with a reason not to be one.
 

Summary:  The last 2 weeks have done a lot of damage to my treasury charts. A good recovery today could help to fend off sell signals on weekly charts but I’m doubtful that we’re in for much of a rally just yet. I do have some timing points not next week but the week after and the 3^rd week in December figures to be a potentially good week for a real swing to occur. I like the fact that my 2 most critical support levels have held but still think a great deal of caution is in order in here and would suggest continuing to use tight money management levels. Right now the 30’s are trading higher while the 10’s are about unchanged. If you really want to play close to the vest which would be my plan, I would recommend stops at 124-06+ below and 124-24+ above. Beyond those levels and a quick extension of the moves could occur. If you are of the mind of sticking with an existing trade beyond those levels, then I would use them as triggers to trail the market with a 9-tick stop.
            

11/18/10 – 8:15 – Yesterday’s trade seemed uneventful enough as everything looked to be correcting the recovery made on Tuesday. The markets were strong early but weakened late and that weakness carried over through the night session and is about to manifest itself in strong downside gaps. I never thought that Tuesday’s lows would hold but I did think they could hold for more than a day and maybe they still will but this should be disturbing to anyone who is expecting better markets.

I’m going to take today’s report in a slightly different direction. I’m going to dispense with any discussion of the ‘other markets’ except to point out that the equities are staging a nice recovery and seem likely to open with large upside gaps, possibly even leaving an island reversal. I’ll get more into that tomorrow after seeing how things play out but today I thought I would do an overview of what I see happening in the treasury markets. Being one who relies heavily on wave analysis, I’d be a liar if I didn’t admit that the wave patterns right now are unclear at best. I will post some charts below that hopefully will make what I am about to say a little less confusing but having taken on a distinctly bearish bias of late I felt this report was in order.

I know this is going to sound confusing at least initially but try to get through it all as I think it will become clearer once you do. The 10-year futures can be interpreted to have declined off the November top in either a 3 or a 5-wave move making any longer-term projection right now very difficult for me although I must say that I think that the 5-wave count, which could prove to be more bearish, may be the better one. That said, even if it is a 5, it could still prove to be either a wave-1 or an A-wave which makes a big difference going forward. The cash 10’s, meanwhile, which made their yield trough in October, could be in either a 3^rd wave or a C-wave since the move up in yields from the November trough is their second such move. The 30-year futures are coming off a double top made in October and they have only had 2 legs down so that could be counted as a 1-2-3 or an ABC, not unlike the 10-year futures. The cash 30’s are about the only market that seems fairly clear as they look to be in the 3^rd wave of the 3^rd wave of an initial impulse that began back in August making them clearly the most bearish chart longer-term. I rarely count waves on the 5-year but with the 10’s and 30’s so unclear, I looked at them and remarkably, while they have retraced less of the bull market than have the 10’s or the 30’s, they seem to have the clearest looking 5-wave move of late making them the most bearish chart since the November yield trough. Collectively speaking with regards to wave patterns, what we have here is a mess. You might wonder why I would have gotten so negative with such unclear wave patterns and at times I find myself wondering the same thing but the fact is that there have been enough bearish developments, some unrelated to wave analysis, that I think the negative interpretations are the better ones.

For starters let me point out that when looking at the bigger picture going back to the yield crests in April, I don’t like using futures charts since we are now on the 3^rd contract since then and that makes them harder for me to use and less trustworthy so I prefer the yield charts for the longer term analysis. When I look at the 30-year, what I see is a market that has already retraced 67+% of the bull market and I read the wave patterns as very incomplete so that to me is clearly bearish not only short-term but longer-term as well. The cash 10’s have only retraced 38% of the bull but as I addressed yesterday, I don’t think that they can be correcting that entire bull market since if they were, it would imply, at least based on wave theory, that the next rally would be headed for the low 1% handle and I just can’t buy into that right now. The only way I could see the cash 10’s as in a correction would be if it was a 4^th wave correction meaning the next new yield low would end the impulse from April. For that to be the case, the third wave would likely have begun in either May or in June. If it was May, then the yield crest from Tuesday would have been a near perfect 50% correction (one of the measurements I used to come up with that 2.77 target) which is good but the problem is that the supposed 4^th wave correction would have taken 25 market days while what would have to be the 2^nd wave correction would have lasted just 5 and that would be a very abnormal relationship for a 2^nd and 4^th wave. I can make the case that the 3^rd wave began in June and with some imagination and taking some liberties with the wave theory, the wave 2 rally can be counted to have lasted 18 trading days which works better as far as timing goes although it would have Tuesday’s yield crest greater than a 62% correction and that is uncommon for a 4^th wave. As you can see, my problem is that the deeper I get into the wave work, the harder it becomes to make a friendly case. Those Price Proxy charts I showed yesterday are disturbing as well and once again this morning, the weekly indictor is flashing a sell signal although that will not be confirmable until Friday. Now factor in broken trend and channel lines that I have shown over the course of the past several weeks on multiple charts and I just find myself in the bearish camp. Hopefully the charts below will help to show the various wave patterns that I’ve tried to describe.  

Charts for the Day:  Below are 4 charts; the cash 5’s, 10’s, 30’s and finally the 10-year futures. I wanted to show counts from the yield trough or price high on each so I was forced to use different time frames for the different maturities. Each one has potential wave labels on them and I’ve used different colors for the alternative counts in an attempt to make them clearer. The only way to really determine if any low is a C-wave or a 3^rd wave is to watch what happens after it. If the rally is a 5-wave move then the low can be a C-wave but if the rally is choppy and corrective, then the more bearish 3^rd wave count moves to the front burner. Right now the latter is clearly the case. Also remember that any potential 4^th wave cannot trade into the area of the 1^st wave so going forward that becomes a tool to use as well. At this point I would also suggest that you look back at yesterday’s weekly charts that show the retracement levels that have been achieved as they factor into my analysis in a large way.

The first chart is an hourly chart of 5-year yields and there the only count that I see is a 5-wave yield rally and that would imply rates there will still go considerably higher. Once this impulse ends and following a correction, another impulse should develop. A correction could eventually carry the 5’s all the way back to what I have labeled wave-4 but that would still leave the door open for a move quite a bit further. Consider that the yield rally shown has already covered about 53 bps so even on a correction as deep as that 4^th wave low, the next wave equality target would be in the 1.70’s. Nothing about that chart suggests a bottom here. The second chart is 180 minute chart of the 10-year. There I can make a case for the move up in yields as being either waves 1, 2 and 3 of an impulse up or else a completed ABC. The horizontal blue dotted line is drawn over the wave-1 high at 2.598 and represents the only yield that a 4^th wave correction cannot trade below. Hopefully wave structure tells us if we are impulsing or correcting long before we get that far.  

 <charts>

Chart 3 is a daily chart of the 30-year which is needed to show the yield trough since it was made way back in August. While I think you have to count that one as in the 3^rd wave of a 3^rd wave, I have included the alternate count which places it in 3 of C which would imply the entire move up in yields is a correction – something I really doubt. The important thing to take from that chart is that the high yield has not likely been seen and the 4^th wave correction once it begins - whether it be part of an impulse wave or part of a correction - should be similar to the 2^nd wave which lasted 13 days so I wouldn’t expect to see a final yield crest before sometime next month. Finally there is the hourly chart of the 10-year futures and that one is the most confusing since there I see 3 equally possible counts and in some respects 4, since if the decline is a 5, it can be either the 1^st wave of a larger move or the C-wave of a correction that began back in October.

 <charts>

At the end of all of this I am left with the feeling that as confusing as it all sounds – and is – it still seems to be telling me that the price highs seen in all of these markets could prove to be very significant tops.

Summary:  For today, with the markets set to open with strong downside gaps and with those very good support areas that held on Tuesday likely to be tested once again, a great amount of caution is in order. 2.97 in the 10’s and 4.41 in the 30’s pretty much need to hold to avoid the likelihood of another 10 bps and possibly quickly. I don’t like using cash markets for my risk management but those are the key levels and I don’t know how to equate them to futures in any exact way. If I couldn’t see cash, I think I would go with a trade at 124-06+ as a stop on any long exposure. The opening gaps will represent the first resistance of any significance which in the 10-year is at 124-23+. I would either sell right there or trail the market with a tight stop of maybe 6 ticks once that level is touched. Tomorrow I’ll get back to more analysis but if anything, I hope this report has served to show that these markets can be in a world of trouble.

11/17/10 – 8:15 – After opening yesterday morning right around Monday’s lows and bouncing, the treasuries caved in once again printing new lows of the move by mid-day. The 10’s and 30’s both came within a single basis point of the support levels I highlighted in yesterday’s report before recovering to  produce nice reversals, especially in the 30-year which had an outside day and closed up more than a point. The high tick in the 30-year futures was the exact gap fill price left from Monday but I think that was as much a function of the market closing as it was the gap being filled. I’m not convinced that the lows made will prove to be any sort of a real bottom but even if they weren’t they could still represent the beginning of a corrective rally that could last several weeks before the next round of selling commences. I don’t yet have good targets for the rally but the next good support targets are near 3.06 in the 10’s and near 4.51 in the 30’s. Clearly though, the reversals were strong and from good technical levels. In the case of the 10’s they were near the 38% retracement of the entire bull market that began in April as well as the 50% retracement of what could be interpreted as the 3^rd wave of the move that began in May. The 30’s held just shy of a gap left from 5/14. One of the problems I have with the notion that the 10’s held their 38% retracement of the bull market - the likely cry we will be hearing going forward - is that based on wave theory it would imply that the move from April to November was a completed impulse and now that the correction had completed, another equally strong rally would unfold from here. The move out of April covered 166 bps so if we were to do that again we’d be talking yields in the 1.30’s. That may not be impossible but to me it’s not very likely.  I could, however, live with the notion that the 10’s have been in a 4^th wave correction of the rally that began in May and that would allow for new low yields below 2.33, but probably not by much. Even that one seems doubtful to me, though, and for now I’m thinking this will be a minor corrective rally that will give way to still higher rates no later than next month. Volume yesterday was good but not what one might expect with such a strong reversal; it wasn’t as high as it had been on either of the 2 previous down days. Oscillators were near oversold but not quite there and both of those things seem to support what I’m seeing in the wave structure - interim lows only. For me, going forward it will be all about wave structure of any further ally and for that I’ll need a little time.   

Some weeks ago I talked about an up-trend line in the Gold market which it had danced along frequently and which had been slightly broken on several occasions but never on a closing basis. That is no longer the case as gold dropped more than $20 yesterday and closed at $1339; well through that line. There should be support near $1315 but interestingly enough, the 38% retracement of the recent bull market that began in late July near $1150, comes in at almost exactly $1300 and that figures to be a great level and eventually everyone’s favorite target. Crude Oil got clobbered and has now fallen nearly $6 in just 3 days and of course with Gold and Crude down so much, it’s no mystery that the CRB got hammered as well. It has fallen nearly 25 points in just 5 days from a high of about 320 – a move of nearly 8%.

While this is a technical report, I feel compelled to mention the fact that the weak Gold and possibly Crude and CRB, as well as the curve flattening reflected by the 30-year being up more than a point while the 10’s were up just ¼, came on a day when CPI came in far softer than expectations. Those markets had all been reacting to the Fed’s apparent efforts to create some ‘inflationary expectations’ and had made large moves prior so a reversal on that news shouldn’t be a real surprise. CPI comes this morning and that could bring some fireworks as well.

And then there’s the Dollar Index which on Monday traded up to its 38% retracement of the decline from June and yesterday sailed through there as well as the overhead trend-line I had mentioned and fell just shy of the 50% retracement at 79.60; the high having been 79.46. It still isn’t likely done in my opinion and if it trades above 80.08, a bull market interpretation would be easier for me to make than would be the alternative.  

Chart for the Day:  I want to post 2 charts of the 10-year today, one a weekly and the other a daily. On them I am putting just one indicator, one that I have shown before called the Price Proxy. It may look like a moving average but it isn’t and if you’ve ever looked closely at moving averages you will know that. It is a directional indicator and one that seems to be able to differentiate between a correction and the beginning of a new move. First is the weekly and there you can see that it has been green, meaning in a buy mode, since the first week of May. Yesterday morning it was flashing red indicating a sell but by the close the rally had turned it back to green which tells me it will likely turn red if yesterday’s lows are approached again this week and likely at a higher level by next week. The second chart is the daily (it comes from a different platform which is why it looks a little different) and there you can see how quickly it turned red after the top. I think there’s a lot to be said for using this indicator as a directional bias for taking trades; the time frame of the chart one would use might be a function of their trading style. I don’t have any rules yet but I love the indicator – what’s not to love?  

11/16/10 – 8:15 – A second consecutive blowout yesterday saw the 10-year eventually trade nearly 2 ¾ points below the highs made on Friday (actually Thursday night). Just prior to the 8:20 opening yesterday morning it was trading with a low of 125-01 which was right at the low end of a solid band of support/targets I had isolated more than a week ago. While for all intents and purposes there is no longer any real pit trade to speak of, as soon as it opened at 8:20, the 125-01 low gave way to run down to 124-22 in the first 90 seconds and that proved to be the low of the day session – at least for 10-year futures. There are normally positives to be taken from a market that produces an extreme low on the opening but in this case, so much damage had already been done that it hardly seemed possible that anything good could come from it and nothing did. My wave-equality target, a channel line constructed from the 8/25 highs and the October swing lows were all gapped over on the opening trade in what may have been stop-loss selling but those were important supports that did not attract enough buyers to hold and that means something. During the early carnage the cash long bond, which had held on to that 4.335 targeted yield crest from last Wednesday, broke it even if just by a single bp before recovering into the early afternoon but a second round of selling produced new lows or nearly new lows in all of the treasuries and leaving them in a shambles. There is some decent support in the cash 30’s from 4.408 to 4.419 derived from a gap left back on 5/14 and in the 10’s at 2.971/975 coming from 2 different Fibonacci retracement targets and both of those levels were tested in the aftermarket when the 30’s traded to 4.42 and the 10’s to 2.96 but it may prove to be too little too late for there to be much of a chance for a real recovery. The 5-year, which had traded to a 1.01 yield just 6 days ago, traded at 1.531 yesterday morning. It’s not hard to understand why anyone who trades the short end of the curve might have seen value at 1.50 following a move of that magnitude in such a short period of time and the early buying carried it back below 1.40 but by the close it was all the way back to 1.493. This morning everything seems to be recovering from lows made in after-market trading but I’m not looking for too much on the upside just yet.  

I’m not even going to bother going over the standard indicators today since it’s pretty obvious they all look worse than they did yesterday. What disturbs me the most, aside from the fact that good support has not had much of an impact of late, is that the move down accelerated from last week and that’s the personality of a 3^rd wave and not a 5th. Wave theory would allow for the interpretation that it could be the 3^rd wave of a C-wave which means that following a correction and one more new low things could get much better but the 30-year chart suggests that won’t be the case since it has already sailed through all of the standard retracement targets for a bull market correction. The 10’s haven’t and that allows for some hope but it’s now easier for me to see the 10’s catching up with the bearish developments in the 30’s than it is to think the 30’s will erase all the damage done there. The curve steepening that has taken place since May has allowed for the 30-year to retrace more than 65% of the bull market while the 10’s have given back just over 34%, each close to Fibonacci targets. Such a great disparity allows for completely different interpretations as to where each market is headed but I prefer to think they are both headed in the same direction over the long haul and the easiest way I can see that happening is for rates to go higher across the curve. A corrective rally should develop soon and I wouldn’t doubt that it comes from the above mentioned supports near 4.40/41 in the 30’s and 2.97 in the 10’s – perhaps from the tests made overnight -  but I’m guessing it will prove to be just a 4^th wave correction with new lows to follow. Show me an impulse wave to the upside and I could change my tune but for now I’ m still thinking lower.  

Other markets:  The SPX rallied early but faded late and closed near its’ lows for the day. The bad news is that it still has not reached any good support but the good news is that the decline clearly looks corrective. I always seem to feel uncomfortable after I say this but for now I doubt that we’ve seen the highs in stocks. Gold, Crude Oil and the CRB all traded lower but without much conviction and without any really new features but the Dollar Index did do something worth mentioning. The high trade there was at 78.71 and the close was 78.59 while as I mentioned yesterday, the 38% retracement of the recent bear market run came in at 78.66. It’s an interesting target but based on the fact that the close was very near the best levels of the day, I’m not expecting to see those highs hold. Next stop would be the down-trend line now at 79.09.

Chart for the Day:  I struggled to find a chart to post that showed much of anything I haven’t shown recently and decided to post 3 yield charts - those of the 30, 10 and 5-year – just to show the relative position of each. I’ve included the Fibonacci retracement targets of the bull market that began in April as a visual reference. At the very worst, Elliott would put each of these markets in a large degree 1^st wave only and if that proves to be true, they will likely get more in sync with one another if a bigger 3^rd wave commences but that figures to be some time down the road - if it is to happen at all. One thing that you can see is that in the case of the 5’s and 10’s, the gaps left yesterday show up on these weekly charts since they occurred on a Monday. That’s unusual and could prove to be very negative if they remain unfilled but I suspect just the opposite; that they are more likely to get filled before week’s end. They will be worth watching though.  While the damage done to the 10’s and 5’s is not that great yet, the 30-year is in my opinion, in a lot of trouble and I doubt that the lows have been seen in any of these markets.

11/15/10 – 8:15 – I mentioned a ‘dilemma’ on Friday based on the fact that while I felt that the 30’s needed to hold their 4.335 yield crest made last Wednesday to avoid signaling a probable move back to the April yield crest at 4.86, I also felt that the 10’s still ‘needed’ to trade through their 125-28 low from Wednesday to satisfy both price and wave-structure requirements with 125-12+ being their ideal target. Friday morning that didn’t seem very likely but a strong curve flattening trade sent the 10’s down to 125-18+ - a 10-tick new low - while the high yield on the 30-year was just 4.275, still 6 bps better than where it had been on Wednesday. It is certainly possible that both levels could prove to be just stops along the way to higher yields across the board but so far the ‘worst case scenario’ in either market has been avoided. While the 10’s still didn’t meet my 125-12+ objective on Friday, the new lows did at least satisfy the wave structure call for a new low of the move so that was no longer an impediment to a recovery. This morning both markets have come under some heavy selling pressure again with the 10’s trading all the way down to 125-05 but the 30’s continue to hold that 4.33 area – at least for now. I’m worried about both markets breaking these near critical levels but at least now both have been tested and both have held – something that seemed nearly impossible on Friday morning.  

Volume Friday in the 10’s was pretty high and while it may have been even higher on Wednesday’s upside reversal, it was still well above average giving no indication that the break is over which is a negative. Oscillators paint a different picture with the traditional slow stochastic falling but still above mid-range and that would seem to suggest there may be enough downside left to break that the October low at 125-01+. My favored cycle stochastic, however, has dropped below 20 and could easily turn back up from oversold on any recovery today. Collectively these seem to be neutral. And now there is a trend-line connecting the September low with the October low with a current value of 125-04+ making the entire range from 01+ to 12+ great support. Finally, the cash 10’s closed at 2.756 on Friday, a little shy of the yield crest made on Wednesday at 2.782 and just about 6bps from a great support area around 2.82 which includes the yield crest made in September as well as the 38% retracement of the move down in yields from May; what could prove to be a larger degree 3^rd wave in what is just about the only near-term bullish wave count remaining. That yield has been exceeded in overnight trading but may still hold when the markets open at 8:20. The weekly charts look extremely heavy and until I see some real positive action I will remain defensive but with at least the short-term the caveat that if these key supports can hold this morning, some sort of bounce could develop.

Other markets:  On Friday I felt that the stocks needed to trade lower and at least fill the gap they had left 11/04 and they did just that with a low in the S&P futures at 1191.50, while the gap fill number was 1195.50. That represented little more than the first support area of any significance so I’m not convinced another rally is at hand but at the same time, I don’t yet consider the highs made last week to be top so much as an interim high. I’ve mentioned several times, however, that I don’t have a preferred wave count that I am comfortable with so while I don’t yet see evidence of a top, I need to see some sort of corrective structure to the decline before I could find a spot to be a buyer. The pullback from last Friday’s high to this past Friday’s low is already the largest pullback since the August lows at 1040 SPX but it still represents less than an 18% correction of the rally so this could be the beginning of a larger move down which is all the more reason that I would not be a buyer without some sort of good technical evidence that a low is in place.    

There were some fireworks on Friday that came in the form of hard downside breaks in many of the other markets that have been so strong of late – namely Gold, Crude Oil and as a result, the CRB Index. Gold fell nearly $40, Crude was off more than $3 and the CRB, which had failed following an upside gap last week that had all the appearance of an exhaustion gap, gapped down and eventually closed down more than 3½ %. The Dollar continued to improve but without nearly momentum of the rallies in those other markets but I think that it may just be the most important one to watch for signs of a true trend reversal that could impact all of the other markets. From my perspective there are 3 important targets to watch for on the upside. Two are retracement targets, the first at 78.66 and the second is 79.60. The other is a trend-line drawn off the June top which has a current value of 79.18, falling just over 8 points per day. Friday’s close was at 78.08. Above 80.08 all bets are off.

 Chart for the Day:  I want to post a chart today that I built last night for the first time. In a way it is a rather unconventional chart, at least for me. I’ve always relied on channel analysis but typically when I draw a channel, I start with a trend-line and draw a parallel to it that is anchored to a point that falls between the two points that define the trend-line. In this case, however, I didn’t do it that way. This is a chart of 10-year yields and I started by drawing a line under the yield troughs from May 21^st and August 25^th. I then drew a parallel line that was anchored to the yield crest made last April. What struck me when I drew the parallel was how, after the channel was broken in late October, the correction that ensued ended with a failed test of that same upper channel line circled here in cyan circle. It was a near perfect hit of that line. To me that serves to validate the channel and it seems to be just one more bit of evidence suggesting higher rates going forward. That channel defined the bull market that began 7 months ago and now it has been broken and I worry that the implications are that a larger bear market may be in the works. I’ll stick with the two levels I’ve been mentioning for more than a week now for my signals that more downside remains - the extremes being 125-01+ in the 10-year futures and 4.335 in the cash 30’s - but this chart is not one I would use to help build a bullish case.

Summary:  The treasuries are clearly at a crossroads for me. The high yield in the 30-year at 4.335 needs to hold as does 125-01 in the 10’s. As you can see below, I also have strong support at 124-28/30 in the 10’s but a trade there would do more damage to the patterns so I would simply use a trade below 124-28 as a sell stop. With downside gaps likely on the opening, I would look to be at least a light seller at Friday’s lows of 125-18+, above which I’d trail the market with a 10-tick stop.

     

11/12/10 – 8:15 – The futures markets were open yesterday but as is always the case when cash is closed, they may as well not have been. The 10’s traded up to 127-07+ on Wednesday night before reversing and trading all the way down to 126-13+ yesterday but the volume was so light that the trade can’t be trusted. I came into Wednesday with a strong negative bias based mostly on the fact that the 30-year had gotten crushed of late and had just one more support area left to be tested – 4.33 - before it would look as though the yield crest in April was a better target than was the yield trough from August; Tuesday’s close had been 4.25. Following a sloppy 30-year auction the bonds broke hard and pretty much nailed the support with a trade at 4.335 and then a funny thing happened; they reversed. By the close the yield had dropped all the way back to 4.237 completing a key reversal. The low tick in the 10-year was 125-28 while there was trend-line support at 125-27+ so both markets responded well to their supports but I really don’t think that the 10’s went deep enough to satisfy what I wanted to see for a potential bottom so now I have a bit of a dilemma. The 30’s have held at a perfect level (see the  last several reports) even if they have stretched their rubber band about as far as I’m willing to allow and still hold out any hope for a good recovery but the 10’s still seem to need to trade lower based on price as well as wave patterns. My guess – and for now it is little more than a guess – is that we have entered into a 4^th wave corrective rally that will likely not carry the 10’s beyond 127-10 before making new lows closer to 125-12+. I don’t want to try and get too cute in here but for now the 10’s haven’t achieved objectives and the wave pattern looks incomplete so while the 30’s may have done what they have to do, I’m still thinking lower based on the 10-year.

The trading in the equity markets yesterday was not nearly as poor as it was in the treasuries as far as volume goes but it was an inside day with no real feature to it. I don’t have a great opinion of just where stocks are in a wave count with regards to either the rally to the top or the more recent pullback. There was a gap left on 11/04 in the futures market that was tested on Wednesday and again yesterday and both days it held so maybe that is the best thing to watch for today and beyond. It would get filled at 1195.50 while the close yesterday was at 1211.75. The short-term charts would suggest to me that it will still be tested so for the very near term, I think a negative bias in stocks is warranted.

The CRB Index, after gapping up to a new 2+ year high on Tuesday, has fallen back and filled the gap leaving it to look like an ‘exhaustion gap’ but I’m think that it was the top of some sort of 3^rd wave and not then end of the rally. I still like the 340 area which is 20 points above the current highs but near term we may have seen a lesser degree high. Gold remains close to its best levels so it too appears to still have some upside potential. The Dollar, meanwhile, continues to improve and even posted an outside up reversal yesterday. The first real test for it will come around 78.68 while the close yesterday was at 78.16 and I continue to think that market needs to be monitored closely for signs of a bottom.

My guess is that today’s trade will still be sluggish since it is sandwiched between a holiday and a weekend and if the volume remains very low, just about anything could happen so I’ll wait to see the weekly closes and go into more detail in Monday’s report. For today I would use 127-00+ as a buy-stop against any short trades and 126-09+ as a sell-stop on any longs.

11/10/10 – 8:15 – When I looked at the markets late last night the treasuries were slightly higher but this morning they are set to open with downside gaps and in dire need of a reversal. An initial bounce yesterday morning in the 10’s off of 127-01 seemed to offer up some hope but by the time they had reached that low, the 30’s had already broken 4.16 and that obviously represented the canary in the mineshaft. Eventually 127-01 gave way as did 126-25+ and then 21+ and by the close the 10’s were still under pressure and making new lows. The 30’s made it all the way to 4.25. I think that means that at least the near-term the rally is done and only if the 10’s can hold in the lower 125’s will I hold out much hope for new highs at all. The 30-year is the market that really has me bothered but that last high in the 10-year just over 128 may very well prove to have been the final push up in a wedge and that would be terminal. If they can find support at 125-12ish and it the decline down to there is a 5-wave move from the highs, then those highs may prove to have only been a B-wave and a strong rally would be possible but right now that seems doubtful in light of the other markets. Meanwhile, if the 30’s can hold 4.33ish then a case could be made that they too could recover based on conventional analysis but having now traded more than 80 bps above their August yield trough, a full recovery there would suggest the 10’s are headed well into the 1% handle and that’s a handle that I just can’t grab onto right now. One last thing to keep in mind is the fact that last week the 5-year traded at 1.01. I can’t see much buying of a 5-year at 1% let alone a yield lower than that so looking at all of the treasury charts collectively, I am officially in the ‘prove it’ mode as far as further new highs are concerned. I should point out that there is still some good support that may very well stem this recent decline before those lower targets are reached; one being 128-11/12 in the 30’s which represents both a wave-equality target and a lower channel line and which is being tested right now. The other is 126-02/04 in the 10’s which is based on traditional support/resistance analysis and is not far below current trades. Either of those supports could prove to be a bound point but I think the damage has been done and burden has shifted to the bulls to turn things back up from either 125.12+ in 10’s or 4.33 in 30’s - or else.  

The volume yesterday in the 10’s was up from the previous day and better than a 50-day average but it wasn’t nearly as high as it had been on Friday or even Thursday when the highs were made. Open interest has actually maintained a friendly pattern by decreasing from the early October highs into the late October lows and then increasing during the rally into the top so there are still some potential positives but then the 10-year isn’t really the issue for me – at least not now. As mentioned yesterday, oscillators are way overbought on both daily and weekly time frames so that can be a concern too and especially if there is another near-term break that takes out that 125-12+ target and especially those late October lows at 125-01+. The real problem I have though is with the 30-year where both the futures chart and the cash chart show signs of real concern but for different reasons and that will be especially true if a low is not made very quickly.

Below and on the left is a chart of the 30-year futures and the first thing that disturbs me there is the fact that they showed no inclination to rally off of the September lows following a double top against the August highs. Secondly, they are very near a line that defines the lower boundary of a channel drawn from the October highs. If the channel doesn’t provide support, the next stop should be a wave equality target at 127-06 shown in black followed by a retracement target From April at 126-19 drawn in blue but by then there may be too much damage done to the other charts for it to matter much.  On the right is the yield chart and it pretty much speaks for itself. It’s the same chart I posted a few days ago with the retracement targets, the extension targets and the simple resistance lines all drawn on it but what really strikes me is the acceleration to the move that has occurred of late and especially yesterday. Even in a correction, the C-wave is a 5-wave move and this chart is showing what looks more like 3^rd wave action in here so I don’t expect a quick bottom to be formed even if it were a C-wave. No, this is beginning to look more like bear market action and while I may hold out hope for both the 10’s and 30’s to hold critical support, I would do so with a greater amount of caution than at any time prior to now. While I prefer to use my 10-year chart for wave analysis, there is a rather easy case to be made for the long end of the curve to be the first to show signs of a break down and that is clearly what we have here.

  <charts> 

The one thing that could turn treasuries around in a hurry would be a faltering stock market and while I don’t yet see any signs that the current highs represent anything other than interim highs, as I had mentioned yesterday, there was little in the way of support nearby in the SPX if it were to come under selling pressure and yesterday it did. Coming off a high at 1227, it traded down to 1209 and I really don’t see any support above 1200 and nothing very strong this side of 1190. A move down there wouldn’t really be that meaningful but it might still spark a rally in treasuries, especially following such a strong break. I continue to plead guilty to not having a comfortable wave count for the stocks so that makes them all the more challenging for me to analyze but for now I am not seeing anything too alarming.

Gold had an interesting day, first rallying to 1424.40 before reversing down to 1382 to finish with an outside down day. There was some speculation that impending margin increases caused some liquidation but whatever the case, it was a large reversal from a new high. The high does look more like a 3^rd wave than a 5^th so I’m not yet convinced that it means too much.  The explosion in the CRB continued as it gapped up and never looked back, closing at the best levels it has seen since October of 2008. The close was 319 and I still suspect we’ll see at least 340. The Dollar rallied further but still hasn’t improved enough to be able to say the downtrend has been broken although I do think it merits close attention over the next several sessions. It closed at 77.44 and needs to make to about 79 to begin to look very constructive.   

On the same day that the 30-year traded through the 50% retracement of the entire bull market, a story out of China reported that their Dagong Credit Rating Company downgraded U.S. debt from AA to A+ with a negative outlook. If that isn’t reason enough to be worried about the health of what has been a bull market I don’t know what would be. I think the most likely path forward is towards higher rates. For today I think I would go with 126-31+ as my buy stop but if the open is below yesterday’s low at 126-13, then that will represent a gap fill and any failure to achieve it will carry with it further bearish implications. Right now it appears that the gaps may not occur. The only logical sell stop would be at 126-01. My bias will now be towards lower prices until I see evidence to alter it.

 
11/09/10 – 8:15 – A quiet inside day in the treasuries left them right about where they were yesterday morning. The good news is that the 30-year didn’t break Friday’s yield high at 4.164. The bad news is that following a rally back to 4.083, it printed 4.152 just before the close. It has bounced a little overnight but I surely don’t like the fact that it remains so close to the lows. The 10’s rallied back to within 5½ ticks of their highs before fading into the close. I’ll still watch for the same levels to hold today – 127-02+ in the 10’s and 4.16 in the 30-year. Below 127-02+ the 10’s may find support at 126-25+/27+ but below 126-21+ they are likely headed back to at least 125-12+ if not 125-01+ - and that assumes that the highs are not in. In the case of the 30’s, beyond 4.16, I look for 4.33 and then I’m not so sure that they will ever recover. I went over all of this in yesterday’s report complete with pictures so I’m leaving it at that and taking a look at the rest of the financial markets that I report on from time to time.

The first one of course is the SPX. Yesterday was a quiet and slightly lower day for stocks. The SPX had rallied from a low at 1183 on Wednesday to a high at 1227 on Friday and that’s quite a push so a small pullback does little damage and is probably constructive. I honestly haven’t yet come up with any good objectives this side of 1300 and don’t yet see any signs that the rally is even tired, let alone done. There is a powerful resistance area in the Dow at 11,750, still about 350 points from yesterday’s close, so I just can’t make much of a case for a top in here based on prices or on wave patterns. Oscillators are a different story though as standard stochastics as well as my preferred cycle stochastics - both daily and weekly - are very overbought which really is no surprise given just how far stocks have come. It was the last day of August when the SPX tested that 1040 area for the 3^rd time before catching fire and here we are just over 2 months later and nearly 200 points higher. Remember that the 1040 area was a perfect place for the right shoulder of an inverted head and shoulders bottom and bottom it did. I don’t care much for relying on the oscillators even if I do look at and mention them from time to time but one thing that is worth keeping mindful of is that given how far equities have come, especially in the just the last few days, if the SPX does come under any pressure there is little to support it for 20-25 points and maybe as much as 40+.  

Yesterday Gold traded above $1400 for the first time, closing at $1409 and it’s up another $8 this morning. Crude close above $87 a barrel and is pushing higher right now while the CRB Index continued on its’ rocket ride. Remember that it had closed above its 38% bear market retracement target last Tuesday and has closed higher every say since. Next stop appears to be up another 25 points. The surprise came from the Dollar which rallied for the second consecutive day since making new lows of the move on Thursday. The counter-trend rally comes despite the fact that everything else seems to still be in the bigger trends that have driven them for months now.

Finally, I’ve mentioned the 30-year/10-year yield spread often over the course of the past year or so and as I look at that chart today, I am just amazed at what I see. There are plenty of reasons for the curve to be widening right now with the Fed buying shorter dated securities and seemingly promoting inflation to some degree but this spread, having been widening for so long already, is getting downright silly. Below is a monthly chart of the spread going back 25 years. During that time we’ve had nearly 12% 30-year yields and at times significant inflation as well as recessions and recoveries but as you can see, never has this spread done anything like what it is doing right now. At its’ simplest, the long bond yield represents an inflation premium over shorter maturity yields. This chart seems to be saying to be very wary of any bullish interpretations of fixed income securities that are not very short dated. If there were to be any real inflation, historically speaking yields are still very low and would seem to have nowhere to go but up. If the 30’s can hold the critical support area that they tested on Friday then maybe everything can improve but unless this picture changes dramatically it seems to better support the bearish interpretation of the 30’s than the bullish interpretation of the 10’s.  

<chart>

11/08/10 – 8:15 – The treasuries appear to be going to open mixed and what could be more appropriate? A perfect fill of the gap left on Thursday - less than a point from the highs of the move - proved to be the low for Friday in the 10-year while the high yield in the 30-year was at the 50% retracement of the entire bull market that began back in April; the highest 30-year yield since mid-June. How strange is that? Now consider that the 5-year traded to the lowest yield it has ever seen just one day earlier. Since their yield trough on 8/25, 30-year yields have gone up 70 basis points while over the same period of time 10-year yields are up just 20 and the 5’s are actually down 26. The 10’s still look to me like they should trade higher and I guess I’ll think that until they break 126-21+ but the 30-year chart looks so bad that I’m just not really convinced. If the 30’s cannot recover from right here, they may well have entered into a full blown bear market. I can’t think of a time when those 2 charts look so different and I can’t imagine that either market can go very much further without dragging the other along with it so it seems to me that we are at a crossroads. Let’s talk first about the 30-year.

Several weeks back I posted a chart of 30-year yields with 3 targets that were in close proximity to one another; one was 4.133, one was 4.138 and the last one was 4.160. The 4.133 was a wave equality target based on the rally out of the August bottom and the pullback into the October low. It was a great wave-based target which the theory suggests should hold, otherwise an extension to  4.322 would become likely as that is where the C-wave would equal 1.382 times the A-wave (Fibonacci). The 4.138 was the swing yield high from late July, what Elliott might label a 4^th wave, and therefore logical yield resistance as well as a great wave based target itself. The fact that the 4^th wave target would coincide so well with the wave equality target made that area a prime candidate for a reversal. Finally, the 4.16 represented the 50% retracement of the entire bull market out of the April yield crest. On Friday the 30-year traded straight through the 4.13 area and hit 4.164 just after the numbers before closing at 4.126. I’ll give it that .004 above 4.16 but without even a rally attempt off of the 4.13 area, any further yield highs above 4.164 would be very disturbing. Oddly enough, the 62% correction of the bull is at 4.324 so now we have 2 different wave-based targets coming into play at 4.322 and 4.324, one a retracement target and the other an extension target, as well as yield resistance at 4.318 coming from the 6/03 yield crest. That’s very much the same situation we had when I first highlighted the 4.13/16 area. Beyond there and a move back through the April yield crest would become likely and that would be the definition of a bear market. The conclusion that I come up with is that Friday’s yield highs in the 30’s must hold for me to think there is any reasonable chance for them to return to a bullish pattern. So what about the 10-year?

The 10’s are closer to the other end of the spectrum - the 5’s are the other end. If the 10’s were to break below 126-21+, that would leave the rally out of 10/27 a 3-wave move and that would make it either a completed B-wave of an ongoing ‘flat’ correction with C-wave targets beginning at 125-12+ - or else it could be the terminal E-wave of a wedge that began back in the summer and that could prove to be a final top of the move out of April. Wave theory does say that the last wave in a wedge, the E-wave, can be expected to either overshoot or undershoot its’ target trend-line so while the high made on Thursday fell a full 17½ ticks shy of the target, it was still a new high and it could be the end of a wedge. While I’m not there yet, that is the one and perhaps the only way that the 10’s and 30’s could find themselves in the same large degree wave pattern. But all that negative stuff aside, for now the 10’s can still be impulsing up. Friday’s low was at 127-02 while the 50% of what I would call the 3^rd out of the 10/27 low was 127-02+. That’s a great place for a low. If it gets taken out then one might look for the 62% which is 126-27+ with that 126-21+ game changer just below there. But if the 10’s are headed down that far, then we can’t really expect to see the 30’s hold Friday’s lows. What I think we’re left with is the fact that Friday’s price lows and yield highs are now huge. And there’s one more problem and that is that the cash 10’s don’t look at all like the futures. They’re nowhere close to making new yield lows below those made in August and on Wednesday they traded through the equivalent of 126-21+ in futures. When I look at all my charts collectively, the fact that I prefer the 10-year futures for my wave work makes me want to be friendly but the fact that it is the only really friendly chart of the 4 makes me more than a little uncomfortable.

I’m going to keep today’s report about treasuries only and will touch on the other markets tomorrow. I wanted to post some charts but had trouble deciding which ones to go with. I usually keep the time frames consistent but I think I’ll mix things up a bit today. For starters I thought I’d put up a decade long monthly chart of the 5-year just for perspective. It traded at the lowest yield it has ever seen on Thursday, 1.016%. In case you’re wondering, that red trend-line drawn under the troughs of 2003 and 2008 is currently around .91%.

 <chart>

Next is a daily chart of the 30-year and here I’ve included all of the targets that I mentioned above to show just where things stand right now and where I think the long bond might go if it doesn’t reverse immediately.  There appears to be the potential for a quick 16 bps if Friday’s worst levels are violated and that next area would represent a ‘must hold’ if I ever saw one.  

 <chart>

The last chart is an hourly chart of the 10-year, again with all of the levels I mentioned above. The red line is drawn over what I’ve labeled as either an ‘a-wave’ high or a ‘wave-1’ high. If it is a ‘wave-1’ then it must hold if there are going to be any further highs in the current pattern. If it is broken prior to a new high having been made then the entire rally becomes a ‘3’ and that means it must be either a bigger ‘B-wave’ of an ABC correction, otherwise the terminal ‘E-wave’ of a wedge becomes a realistic interpretation. The blue retracements show targets for the current pull-back if the highs have yet to be seen.

 <chart>

11/05/10 – 8:15 – Yesterday was an explosive day in just about everything except the dollar; which I think is exactly what the Fed was shooting for. The treasuries, with the exception of the cash 30’s, were all up strong as were equities, gold, crude oil, grains, meats and just about everything else that makes up the CRB Index, which went sailing through its’ 38% retracement of the bear market that began in July of 2008. There had been a lot of speculation that the Fed wanted to create ‘inflationary expectations’ and if they did - well then they’ve probably made a good start. The 10-year futures easily exceeded their previous highs of 127-22 with a print at 128-01 in what now clearly looks to be the 3^rd wave of an impulse that began on 10/27, although the cash 10’s with a low yield yesterday at 2.46 remained well shy of their previous yield trough at 2.33. That can prove to be problematic with regards to the analysis but for now I am hoping to see the cash follow the futures to new highs. That having been said, this morning’s jobs numbers can be a pattern buster so I really want to get past them before I’m willing to make any more bold predictions. I had mentioned earlier in the week that there was a possibility that the 10-year futures were advancing in a ‘wedge’. The upper boundary of that wedge has now reached 128-20+ so a failure from anywhere near there would be a concern but otherwise I see no reason why the futures can’t make it to 130 and it would take a trade back below 126-21 to break that pattern. There is one other observation I’d like to make though and that is while the 10-year futures made new rally highs yesterday, the 30-year cash was making new pullback lows, posting the highest yield it has seen since 7/29. The spread of 30-year yields to 10-year yields, which I had begun addressing what seems like a year ago when it was flirting with its’ all-time wide a little over 100 bps, hit 156 yesterday. That’s another indication that the markets believe that inflation may be the product of the Fed’s actions. Of course that spread has been forecasting inflation for quite some time now. This just makes for a good reason to focus on the 10’s since I see no way to find a common count for both maturities any time soon.

Back on October 10^th I wrote that if the SPX could clear 1158, I saw no reason why it couldn’t print new highs for the year above 1220. Yesterday it closed at 1221 and if the rally can extend a little more, then it might just be able to extend a lot more but the fact is that this is the one area that can be a problem. I don’t want to get too cute on the absolute price but with the news due out this morning, I may not have to. With any sort of a surprise that index could break sharply in either direction. I honestly never thought I would be saying this but if a top is not made very near here, then I could make a case for new all-time highs. Wow! That’s such a crazy thought to me that I don’t even want to discuss it any further until I’ve seen what happens from here but I will be posting a chart of the SPX early next week with wave counts and objectives on it.

The explosion yesterday in the CRB Index that carried it through its’ 38% retracement target brought my attention to an intriguing area that may yet be tested. The next retracement target, the 50% retracement, is at 337.07 while now there is also a wave equality target coming off the bottom at 340.82 making that a very good target/resistance area even if it is still a long way off. Helping to push the CRB was gold which exploded up more than $40 to a new all-time high while Crude Oil was up nearly $2, approaching $87/barrel. The Dollar broke below the lows it had made in October and appears to be headed back to the lows established in November of last year at 74.17. Yesterday’s close was at 75.89.

11/04/10 – 8:15 – Finally something to talk about. The 10’s are currently trading within half a point of their previous top and they’ve made it here so fast as to give the appearance that they are impulsing up towards a new high. That wasn’t the case yesterday afternoon at 2:15. The treasury market was a shambles in the minutes that followed the FOMC statement release. A single bar on a 5-minute chart of the 10-year ranged from 127-02 to 126-04 even though 15 minutes later, they were trading back within ticks of where they had been prior to the news. Not so for the 30-year which in 20 minutes fell 2½ points and never recovered. By the 3:00 close they were a full 3 points from their highs, highs which had been 1¼ points higher on the day. The cash 30-year actually traded through the yield crest it had made last week leaving that chart in an altogether different position than any of the other treasury charts I watch. I try to read each one independently of the other but it seems highly unlikely that we’d see that large of a break in the 30-year futures if they were impulsing up (the cash can’t be impulsing up since it made new lows) and it seems equally unlikely that the 10’s would be impulsing up without the 30’s so even with the overnight strength, I want to lean in the direction of an ongoing correction in all of the treasuries. Ongoing would likely mean that following a test of the highs at 127-22, the 10’s should then head back down towards the lower end of the range they have been in for the past 2 weeks in the area of 125-00. That would be followed by an impulse to a new high likely in the next 2 weeks give or take. That is a very preliminary read based on less than an hour’s worth of gyrations on my day session charts following the Fed announcement but that’s how I see it. It’s rarely clear though and that call comes with 2 caveats. Given the action in the cash 30-year yesterday it is possible that they have yet to see the low end of their trading range suggesting possible further correcting while the 10-year is so close to the high end of its range it seems to be impulsing up. For the record, in early trades this morning the 10’s have retraced 85% of the decline from the high on the 6^th while the 30’s are within 11% of the lows of the same move  – and that range in the 30-year is nearly 6 points. It is as if they are 2 entirely different classes of assets.

Lately I’ve posted charts of the 10-year showing my presumed wave counts and I thought today I would post charts of the 10’s and the 30’s to show just what yesterday did to those patterns. These charts were captured at the close yesterday and don’t even reflect the last ¾’s of a point up in the 10-year made overnight. Since both futures markets remained within their recent ranges, one could make a case that the wave patterns have not changed but heading into yesterday I felt that there were 2 equally possible scenarios - an impulse up and a B-wave up - and now I’d have to favor the B-wave scenario since it carried with it the likelihood of a choppier rally. These charts are 180 minute bar charts with price charts on the left and yield charts on the right – the 10’s on top and the 30’s below.

<charts>

The SPX finished with an outside up day into new high territory for the rally and on very good volume but the Dow didn’t and it remains below the large double top against the April highs. The equity markets have moved higher overnight and it seems probable that the Dow will exceed that area of concern. Nothing has really changed with regards to stocks; I still see the least friendly count having them in a rising wedge with targets somewhere near 1207 and perhaps quite a bit further. The CRB and Crude Oil continued higher while the Dollar continued lower although Gold faltered and closed lower. I think the CRB will likely continue higher and the Dollar lower but with no good opinion on Gold. I want to stay focused mainly on treasuries in here though and will address targets on the other markets tomorrow or next week.

Once this massive curve shift - that came as a result of the Fed’s announcement of the maturity types that they will be purchasing - has settled down, the 2 markets should once again move in tandem. If the 10’s can make a clean break of their previous best levels at 127-22 in futures and 2.33 in cash, then they may well be in the impulse I’ve been waiting for. A failure from those areas that takes the futures back below 126-21 and the cash yield back over 2.56 would hint that the rally was in fact a B-wave. If it wasn’t going to be the election that sparked a move it figured to be the Fed but let’s not lose sight of the jobs numbers now due out in 24 hours. If we ignore what is going on in the 30-year and focus only on the 10’s, it seems very unlikely that we won’t have a resolution to what all of this means by early tomorrow. Right now the 10-year figures to open with an upside gap that would get filled on a trade under 127-02. That might be a good – but aggressive - place for a protective stop today as with all of the recent volatility and the jobs data tomorrow, things could settle down rather quickly. I certainly would not stay long on a trade below 126-21. If a rally were to carry the 10’s to 127-20, I would get as flat as I could in front of tomorrow morning.

I had suggested in yesterday’s report that there was a possibility that the SPX was in a rising ‘wedge’ or ‘diagonal triangle’ based on the continued pushes to new highs in what are 3-wave rallies. That is clearly one of the more plausible wave counts and if it were to be the correct one, then the perfect target for a top would be against a trend-line drawn over the highs of 10/13 and 10/25. The caveat to that statement is that wave theory teaches that final waves in wedges frequently undershoot or overshoot their trend-line so it can’t be taken too literally as a target. Secondly, it is obviously a moving target, increasing each day by about 1½ points. Currently it has a value of 1206.43. There is a far more bullish interpretation of those 3-wave rallies which would project prices up more in line with my forecast from more than a month ago which was the that the SPX should see the previous highs for the year at 1219 – at the very least. 

The fact is that yesterday, while there was some movement, most markets were still rather quiet. Volume was very low in both the treasuries and the equities. The CRB had a big up day trading to levels not seen since October of last year, pushed along in part by a strong Crude Oil market. Gold was up but not much by the standards it has set recently. The Dollar was weak yesterday and appears to be headed back through the lows established on 10/15; lows which never did reach any of my downside objectives. The strong commodities and weak dollar are likely feeding off the quantitative easing expect to be outlined by the FOMC statement this afternoon but that news has been interpreted as both bullish and bearish by treasury traders of late so we’ll have to see how the final announcement is reacted to by them.

11/02/10 – 8:15 – A good extension of the rally early yesterday morning seems to have confirmed the 3-wave structure of the entire decline by pushing the cash 10’s through their equivalent to that 126-09+ in the futures. The highs came early and the markets broke back down through unchanged before closing right about there and that just might be all we should expect to see before tomorrow morning. In keeping with the tendency of at least one market finding a perfect number to turn on, the 30-year futures perfectly filled the gap they had left on 10/26 before reversing. That gap still remains in the cash 30’s but nowhere else. While the decline looks to be a clear 3-wave move, for now there’s no clear evidence that the rally is either a 3 or a 5 so I’ll maintain a friendly bias but with no opinion just yet on whether or not this current push is likely to make new highs. Keep in mind that even if the friendly forecast based on the 3-wave structure of the decline is correct, this rally may still be a B-wave and those figure to be very choppy. While neither the 10-year nor the 30-year are very close to the highs they established back on 10/08, the 5-year has already retraced 70% of the decline which is just one more reason to think that the highs have not yet been seen.

The stocks are puzzling to me as far as wave structure goes. Just about every rally leg I look at going back to the 1130 lows in late September appears to me to be a 3-wave move and that is very difficult to explain using wave theory. The one pattern that calls for 3-wave rallies is a wedge or diagonal triangle but that just doesn’t seem fit currently although we may need to address that if the market is still in this area on Wednesday. If it isn’t a wedge then a very bullish case can still be made counting all of the 3-wave rallies as simply b-waves or x-waves preceding a very powerful move. There’s just a lot of uncertainty in my mind which I think will become much clearer later this week. Yesterday the S&P basically doubled topped against the highs it had made back on the 25^th as did the Dow which had already made a double against the previous highs of the year made back in April. Each time these areas get tested and hold, it seems all the more likely that they will eventually give way.

Below are charts of the 10-year futures and the cash. To me they are similar enough that I didn’t bother to label the cash chart but I did leave that one measurement on it that shows the wave equality target.

 <charts> 

The reason I left the wave equality there is that it paints the one picture that each time I look at I want to be long bonds. Until that yield crest is exceeded it represents a beautiful picture of a correction in front of a large move. That is the single most bullish clue I see for a rally developing sooner rather than later but otherwise I see the decline as an ABC corrective structure that may still prove to be only an A-wave of an ongoing correction. These 2 charts show clearly why the decline cannot be counted as an impulse wave being mindful of only one rule of wave theory; a 4^th wave cannot trade into the area of the preceding 1^st wave. The next few days should tell the tale with regards to what this rally is likely to turn into.

As far as today goes, while I wait for the wave structure to guide me from here I think it is a good idea to be conservative and let the patterns unfold. If you’re a ‘buy and hold’ sort of player then I guess I think you can buy and hold but I think better opportunities lie ahead as far as trading with confidence goes. I would use a trade below 126-02 as a sign to get out of longs with a trade above 126-16+ being an indication that we will trade at least another 10 ticks higher. Just remember when you vote today, if you think that the 10-year is on its way through 2.33 right now, then vote for the impulse wave but if you think it is more likely to fail on this attempt and move back through the range then cast your vote for the B-wave.

11/01/10 – 8:15 – Thursday’s recovery carried over into Friday pushing the 10-year futures above 126-09+ and leaving the entire decline there looking a 3-wave move and therefore corrective. That pretty much says that new highs will be seen – at least based on wave analysis of the 10-year futures. The low yield in cash 10’s was 2.61 while they needed to breach 2.587 to confirm what the futures did so while I prefer to use futures for my short-term wave patterns, I’d like to see that 2.587 violated before I got too excited. Presuming the cash does confirm the decline to be a 3, still to be determined is whether the lows made on Wednesday ended an ABC correction or only ended the A-wave. The fact that the bottom came on a 3-wave decline from the secondary high on the 20^th suggests to me that it was only an A-wave but the fact that at their worst levels seen on Wednesday, the cash 10’s hit a near perfect wave equality target could be taken as evidence to the contrary so maybe it’s a toss-up but the important thing seems to be that the wave patterns have now at least become far less bearish than they were just a day or 2 ago. Assuming that the cash confirms what the futures have already told us, then the 10’s are headed to new highs but it’s still too soon to know how quickly. If they aren’t headed there right away then the 2 most likely scenarios are that they are head up in the B-wave of a ‘flat’ with objectives right up against the previous highs before they fail, otherwise they could be in the B-wave of a triangle with targets just a bit shy of the highs. In either case though, new highs would seem be coming with only the timing still to be determined and the likelihood is that they are in a rally mode right now even if the rally is corrective. The markets have been so volatile of late I hesitate to take some of the short-term signals too literally and I do think it’s a good idea to make the cash confirm the friendly count but based on what I see now, the rally is not likely to be over.

The charts that I posted on Thursday and Friday showed the patterns as I saw them and with this most recent push up, they have pretty much made their statement. I’m not going to post them again until there has been more price movement from here. Tomorrow’s elections can still change things I guess and it may just be quiet until the results are in so I’m going to avoid trying to over-react to the very short-term chart patterns today and tomorrow. That said this may be a good time to mention some of the indicators that I address from time to time on the longer-term charts. One of my favorite directional filters, the Price Proxy, turned bearish on my daily chart the second day after the high and remained bearish at the close on Friday but has turned positive this morning although the signals as I take them are only based on closes. The weekly Price Proxy was flashing red (bearish) for the first time last night but that was the opening tick for the week and this morning it is once again green so I wouldn’t want to read too much into that but it may be telling by the end of the week. All of my daily stochastics are pointed up after having reached oversold territory while the weeklies are just the opposite. In the case of the traditional stochastic, the weekly shows a bearish divergence building at the highs. Volume has been good the past 2 rally days but was still a little higher on the 2 preceding down days while open interest, which had declined during most of the price decline, increased at the end of the decline indicating new sellers putting on positions at the lows. It then declined a little on Thursday which was probably the result of some of those poorly placed shorts being covered. All told, all of those indicators taken collectively offer little in the way of a consensus about where the markets are headed. I think they favor the upside but inconclusively and that leads me back to the wave patterns so I will remain friendly in the bigger picture. Today and tomorrow could prove challenging however.

Stocks continue to look to me like they have yet to see their highs as well. It would seem more logical to me that investors of equities might be more concerned about the elections than investors of bonds and yet the stocks haven’t even really had a scare yet and remain very close to the highs of the move. The Dow is still holding below the highs of the year first printed in April and for all intents and purposes, printed again last week, but absent any real surprises, I don’t think those highs will hold; at least not based on the S&P. Gold had a strong day on Friday following another test of the trend-line drawn off the July lows. On 3 of the previous 5 days gold has tested that line and on each of those days the market recovered after breaking through it and this morning it is up again. The CRB has also been strong while the Dollar has weakened so we seem to be back in that mode of buying all assets against a weak dollar.  

While there are some mixed signals coming from the treasury charts – the 10-year futures appear to have declined in a 3-wave move but one that might just be an A-wave while both the cash 10’s and the 30-year futures are showing signs that the decline may in fact be an entire ABC – I have to be biased to the upside. That said, if the 10-year futures are telling the right story any rally from current levels can prove to be a very choppy one so based on that pattern and to a lesser degree based on the upcoming elections, I’m not necessarily in a camp that screams ‘buy bonds’. If the rally proves to be corrective then there will be a great opportunity to buy the C-wave decline for a nice move. If it proves to be impulsive there still may be chances to get in with better risk control while if it simply runs away to the upside then a wonderful selling opportunity awaits those who are patient. Today and tomorrow figure to be challenging and hopefully quite telling. I would play my cards as close to the vest as possible this morning using 126-01 as my stop on longs and 126-25+ as a selling opportunity with 31 as a stop. If you chose to react quickly to a move this morning, Friday’s high tick was 126-11 while the last trade I see is at 13 so if the bid remains and the 10’s open with a gap more than a few ticks above 11, then a trade below that gap could be used as a stop on a long while I also see good resistance at 126-19 so 20 could be used as a buy stop. That’s just and 8-tick range and it would be pretty aggressive, especially in a market that seems poised to move higher, but choppy still seems like a pretty good guess for today.