^_Tbondtrader

10/29/10 – 8:15 – A really strong rally and it came on pretty good volume. Not as good as it had been on the previous 2 down days but enough to respect. The 10’s overshot the top of the gap they had left on Wednesday but the 30’s only managed to narrow their 2 tick gap down to 1 tick before backing away. It seems that you can always find one market that turns from a good number but finding the right one is the challenge. So what now? I still think just what I thought yesterday morning which is that the 10’s are correcting an impulse that began back in May if not all the way back in April. While I can’t rule out the possibility that they may have ended a correction of the move from 9/13 and be about to explode, I rather doubt it and would attach about the same probabilities to that idea as I would to the notion that the bull is dead. I think the most likely wave count is that the 10’s are in an A-wave decline that may or may not have completed. Only a trade above 126-09+ would say that it has, making that the trade that would open the door to a potential move back to new highs. While it’s too soon to know if that call is correct, I would definitely use a move above 126-09+ as a sign to exit any short positions. With the current wave picture, I don’t have any level below that is as clear of a stop for a long position but I think a trade below 125-17 might be a good one but I guess I’m getting ahead of myself mentioning stops this early in the report. Let’s take a close look at the charts and see what they are telling us.  

With yesterday’s high being 126-00 and the gap beginning at 126-02, I just see no reasonable way to trade the short side using any stop other than one just above 126-09+. As mentioned earlier, I don’t have any clear long side stop but think that using a trade below 125-17 makes some sense. When the dust settles at 3:00 today, I would be paying special attention to that 1.281 area in the 5-year as a close through it would be a bearish one for sure. The close yesterday was 1.237 so we enter the day better than yesterday but with GDP numbers early and PMI a little later, anything can still happen. The weekly and monthly charts of the 10 and 30-year are not very pretty and absent a hard turnaround today, will lead those markets into next week with a negative bias but we have a great nearby level to watch in the 10-year and that will be my focus for the day.        

10/28/10 – 8:15 – I believe that yesterday’s action effectively drove a nail in the coffin of the potential near-term ‘explosive’ rally that was at least a possibility based on wave analysis prior to yesterday for which I’m happy since it never seemed logical to me anyway – especially with regards to the 5-year.The decline can still be a correction but now if it is, it isn’t correcting the impulse from the 9/13 lows but rather from lows much deeper and much early, probably in mid-May. There is a chance that the highs made on 10/08 represent the top of a 3^rd wave of the impulse that began in April in which case the best targets for the pull-back begin at 2.82 and extend to about 3.12. There are reasons why I like that count which I’ll get more into at a later date. If that isn’t the correct count, then we could be correcting the entire move out April and the objectives don’t begin until about 2.97 and extend all the way to 3.37. Finally, this may not be a correction at all but an impulse wave, the first in a series of impulses in what could be the beginning of a protracted bear market. The interesting thing about the idea of this being a correction of a 3^rd wave with targets that begin at 2.82, is that 2.82 is a really solid support area anyway. The high yield from 9/13 was at 2.827 while the 38% retracement of what I think could be a 3^rd wave is at 2.820. I do think that the 10’s will get there and I suspect that they will rally when they do since it is such a visible area of support but that alone won’t be enough to take the heat off. With back to back gaps this current push has all the characteristics of a 3^rd wave and if the 10’s reach that area quickly, they could just back away from it in what could prove to be a 4^th wave correction before pushing through for a 5^th wave and if that were to occur, then that wouldn’t figure to be the final low either since the entire correction will not be a 5-wave move. In that scenario, that might very well be just the first of at least 2 such impulse waves. If you simply look at these charts of 5 and 10-year yields, you can see just how troubling this move up in yields is; the gaps being the most troubling features. They appear to be ‘breakaway’ and ‘runaway’ or ‘measuring’ gaps and that says more selling is likely in store.

 <charst>

For the second straight day the stocks got off to a rocky start but finished near the highs of the day. They just don’t seem to want to give up but I still suspect that they won’t make much forward progress from here before Wednesday at the earliest based on nothing more than the excuse that am hearing more and more; that being that the elections have investors on the sidelines. I still think there is upside in stocks but the Dow will be the problem child since so far it has failed with a perfect double top against the previous best levels of the year. Gold broke its uptrend line but stabilized and closed back above it while the Dollar rallied yesterday but for me and for now, none of that matters much. This is about fixed income and those markets are making the most noise right now.

Wave theory would allow for the treasuries to be in a C-wave based on wave structure and given that the 10’s are within 10 bps of a good target it might seem like a bottom is almost at hand but I doubt it. Now that it is apparent that they are correcting something much larger than just the last leg up which lasted about a month, I suspect that even in a best case scenario they are just in an A-wave based on timing alone. It’s too soon to know that and even knowing it wouldn’t help too much since an A-wave can be either a 3 or a 5-wave move depending on whether the correction proves to be a ‘flat’ or a ‘zigzag’. I need to see a low that holds for a number of days so I can examine the structure of the rally before I will know much more than I do now but I do think that the cash 10’s will see 2.82 and from there they will likely bounce at the very least and that may be where the pieces of the puzzle fall into place. I mentioned in yesterday’s update that the 5-year could be in danger of making a key reversal on a monthly chart. When I wrote that the 5’s were at 1.247 while last month’s close was at 1.281. Yesterday they closed at 1.304 so now they are in dire need of a rally today or tomorrow to avoid one. A key reversal on a monthly chart from an all-time extreme would be very troubling to say the least. As much as it may sound like it, I am not yet ready to give up on the 4^th wave correction theory for the 10-year. I think we can rally from near 2.82 and depending on how such a rally might develop I could become pretty optimistic. For now though, I am not optimistic that a low could be in place and believe that any trades taken on the long side need to be taken against good support with a stop that one is willing to honor.

Much to the speculation about why the markets have been hit so hard goes to the idea that the Fed is intentionally trying to create at least inflationary expectations as a means of avoiding the opposite. It goes on that they will do that through their next round of quantitative easing by making large purchases of treasuries to inject liquidity in the system. It wasn’t that long ago that the very same speculation sparked a massive rally and why not – when the Fed buys treasuries they should go higher. Things seem to be different now and investors seem to be more concerned about what they are trying to avoid than about what they are actually doing.

The 10’s are trading at 126-18 pre-market with a gap from yesterday that runs from 17 to 20. I would hate to see the opening and suffer all day long but a great deal of caution is in order. A trade at 21 would seem to target the next gap at 126-02/09+ and I wouldn’t look for that one to get filled, at least not now. I see minor support at 125-08 with the first good support at 124-28. So to me the only levels that are really important are 126-09+ above and 124-28 below but in such a violent and soft market, if you are looking for an early exit in either direction, I’d suggest using 125-21 and 125-07 for money management levels. With 4 days to go before the elections and so much selling of late, I could see the markets stabilizing in here but I think it is doubtful they have bottomed.
 
             

10/27/10 – 8:15 – The lone surviving trend-line drawn from April, the one on the 10-year futures, was broken yesterday as was the 38% retracement although my wave equality target, the one that I thought was the highest support that was likely to hold, did hold to the tick – at least yesterday it did. This morning the 10’s are set to gap down again as they are currently trading below my next support area in the low 125’s. I think the prospects for the explosive rally, the one I always doubted could happen but just couldn’t ignore based on wave theory, have just about evaporated this week with the multiple downside gaps. Actually at yesterday’s lows there was still one trend-line from the April highs that had yet to be broken, one on a ‘front month’ chart which I really hate to use since they are ‘fictional’ charts in the sense that they are a compilation of different contracts woven together over time. Not to matter though as that one will be gapped over this morning. What comes next is still subject to debate but now I think that the best 2 alternatives are that we either need to complete a correction of a much larger move, than the one from the September 13^th low with objectives that begin near 123 and truthfully are better under 122, otherwise this may prove not to be a correction at all but rather the beginning of a series of impulse waves up in yield. The 5-year followed up Monday’s big outside reversal with a large gap and looks to be set to do it again as that chart is beginning to look like a full blown train wreck. With all of those negatives to deal with I find it difficult not to believe that the rally days are behind us for at least the near-term but I also still suspect that the upcoming elections will impact investment decisions – at least until they are over – and the 125-09/13 area represents a 50% correction of a large rally and even with all of the other negative factors to deal with, that is a pretty solid technical level and one that very well may attract at least some buying. With what will now likely be 2 gaps above to deal with, it seems logical that we will see some sort of buying enter the market but I wouldn’t be too optimistic about what it will turn into. Today’s gap probably won’t be that difficult to fill but yesterday’s, which needs a trade at 126-09+ to remove, may prove to be too much to overcome if the treasuries are really headed lower which appears to be the case.    

The stocks got off to a rough start yesterday but a late rally produced basically an unchanged close which I felt was constructive following the action from Monday. Volume was nothing to write home about so not much was really determined. I’m still concerned about that massive double top in the Dow against the highs of the year but if those highs made on Monday can be exceeded, then 1203 SPX followed by 1219 would be my next targets. This morning the stock futures seem to be going the way of the bond market with the S&P trading down about 6 ½  points. Modest gains were made in Gold yesterday but this morning it has already re-tested the trend-line that held on Friday and it is looking more and more like it will not hold. The Dollar improved yesterday and is up again this morning making it seem more and more likely that the trends which have gripped all of these markets for months now may have finally come to an end of some degree. 

I promised a chart of the 10’s with wave counts for today so here goes although realize that these charts do not reflect the damage done overnight, showing the action only through yesterday. I’m posting one of futures and one of cash since they reflect different pictures although if the treasuries don’t reverse early this morning, that may not be the case. The cash have looked much weaker than have the futures but I think that 125-09+ needs to hold futures or they will both be telling the same story. I’ve included the Fibonacci retracement targets from the low on 9/13 since if there is to be another rally, it should be from a retracement of that move and not a complete erasure of it. Once all of the retracement targets are exceeded, then the entire rally from 9/13 will likely be given up and that would mean that it must have been the 5^th wave of a larger move, one that would then have to be retraced to some degree. How deep that type of correction might go is a subject I will get into once it is determined that the move out of the 13^th is actually not just a 1^st wave of something much bigger – which could be determined in about half an hour. I don’t think that it is but why speculate now when the answer is likely to be known soon. I’ve also included the wave equality measurement (labeled 100%) which is always a preferred target of mine when doing an ABC correction and finally I have included the trend-lines drawn from the April. Given where the 10’s are right now you might ask, ‘why bother showing targets that aren’t going to hold’? To me that answer is clear in that how a market reacts at good support or resistance tells volumes about the health of that market. The futures chart is the front-month chart that I addressed in the first paragraph which explains the trend-line that as of yesterday had still held. What I especially don’t like about these charts is that any bullish count would require that this current decline is a C-wave and if that is the case, then it needs to be a 5-wave move and at best they would appear to still only be in 3^rd waves so it is doubtful to me that even a low today will prove to be a ‘bottom’ even if the level proves to be a good one. Once the futures give up 125-09 and the cash trades through 2.714, any chance of a near-term rally of any significance based on wave theory will have been eliminated.   

10/26/10 – 8:15 – This morning I see that the treasuries have come under some pressure overnight and I’m not at all surprised. The early strength in the treasury markets yesterday was offset by the late sell-off and at least in the case of the 10’s, it was pretty damaging to the charts. The 30’s did manage to close higher on the day though in about the middle of their daily range but the 10-year didn’t fare so well. After posting a high tick at 126-30+ just before 9:00 a.m. they traded down to 126-09+ before closing at 13, a tick lower than on Friday. Being one of those days where there were two distinct trades – a rally in the morning and a break in the afternoon – makes volume analysis confusing but for the record the volume, while still unimpressive, was at least an improvement over that of Friday. I don’t want to make too much out of it but when a market heads in any direction and volume expands you can typically expect to see it continue to move in that direction. And then there’s that trend-line on the weekly chart of the cash 10’s that held by the slimmest of margins at Friday’s close. Coming from the April yield crest, it is a downward trend-line and the value for this week has dropped from 2.569 to 2.518 leaving the 10’s cleanly on the negative side of it. The daily had given way last week so this is just one more piece to the puzzle that needs to go on the negative side of the ledger. I also think that the bond bears have the wave theory on their side so I will continue to look for what I will call a C-wave decline at the very least, with objectives that seem to be best at 125-20 or lower. While the 30-year may have performed better than the 10’s, before getting to excited about that you might want to look at a chart of the 5-year which had a huge negative outside reversal day yesterday seemingly pointing that chart to still higher yields as well as you can see in the yield chart below.

 <chart>

To me yesterday only enhanced the notion that we still need to see another price break to the downside in treasuries.

Oddly enough the stocks performed about the same as did the treasuries with a rally in the morning and a break in the afternoon. Actually stocks broke off their highs early in the day and then experienced a secondary sell-off late but at the end of the day the SPX was still trading higher if only by about 2½ points after having been up about 13. The CRB Index, the Dollar Index and Gold all closed about in the middle of their ranges after strong opening bursts. Gold is coming off a test of an important trend-line and if the stocks were to have a bad day today after closing at the low end of their daily range yesterday, I wouldn’t doubt that we will have seen the extremes in both of those markets for at least a short while. The SPX traded at 1196 yesterday while my first target has been 1203 and even thought I felt that the best target was back to the highs of the year at 1219, having now achieved 96% of the lower one, I do think that any sort of reversal should be respected as a potential interim high at the very least. And not to be ignored is the DOW which traded at 11,247.60 yesterday while the high for the year posted on April 26^th was at 11,258.01. That was in fact the highest level seen in the DOW since September of 2008 and if you don’t care to do the math, at yesterday’s high, the rally from the July low had retraced 99.37% of the decline from April. I’m sticking with the notion that bonds will likely trade lower from current levels but with the elections now just a week away, I wouldn’t be too surprised to see things quiet down in all of the financial markets in front of them. I doubt that their outcome will have any real impact but I don’t doubt that it will be viewed as a newsmaker and of course the results will be spun to death.

If you don’t still have the update from last week handy that included the charts of the 10-year cash and futures with objectives for my suspected C-wave, the objectives are as follows: in the futures they begin at 125-27+/30 followed by 125-20 and then 125-09+/13 beyond which I suspect the highs are in for a while. The cash 10’s have really only 2 good remaining objectives at 2.639 and 2.714 before they will target at least the 9/13 yield crest at 2.827.

If you take a look at my support numbers in the table below, you will see that I have good support at 126-02 which is just about where the 10’s are trading as I write this report. I’ll stand by the notion that there should be good support there and given that long-term double top on the DOW chart, there may be an attempt to hold the treasury market here and see how stocks fair but support and objectives are 2 different things and I don’t see this area as any sort of an ‘objective’. A rally from here would likely only be a minor C-wave rally which would only delay the larger degree C-wave decline. A reversal from 125-30 would be a little more interesting but I still think the futures should trade down to 125-20 in a best case scenario and even then it will be critical to see just where the cash holds. A recovery today could set the stage for consolidation into election-day but the patterns are what they are and until I can count a 5-wave decline from the highs made on 10/20 at 126-07, I will continue to expect to see lower lows. For today I guess I would use a trade at 125-26+ for a sell stop but be especially wary of that 125-20 number should it get tested. If the 126-02 area holds then I could see a recovery lasting into next week with objectives back over 127 so with that in mind I think I would use 125-16+ as a buy stop. Tomorrow I’ll include charts with my wave counts applied. 

10/25/10 – 8:15 – Here we go again.  Not only are the treasuries set to open with upside gaps but so too is the stock market, the gold market, crude oil and of course the CRB. The Dollar is once again under a lot of pressure so perhaps the trends of the past several months in have yet to exhaust themselves. Friday’s gap opening in the cash 10-year (up in yields) carried it cleanly beyond the trend-line drawn off the April yield crest and that coupled with the near double top made against the previous Friday’s yield high makes the likelihood of that level holding low - at least in my opinion. The opening gap survived the close in cash although it was a small one while the futures filled theirs. Both markets closed slightly lower on the day but still better than where they had opened so things could have ended worse. As I had mentioned in Friday’s update, the trend-line from last April when drawn on a weekly chart had a value last week of 2.569 while the close was at 2.563 so that, too, could have been worse. I guess at the end of the day and the week, nothing much was settled and I come into this week the same way I came into Friday – feeling like there still needs to be another downside break and wanting to see just how far it goes before making any bold assessment. I still think that if there is to be a rally from anywhere this side of a 123 handle in the futures, it will likely exceed 50 bps and I continue to struggle with the notion that there can be that much room left to rally, especially in the 5-year. The prospects for any move of that magnitude in treasuries may depend on stocks and I still see no reason to think they can’t keep trading higher even though Friday didn’t help the case much there. The cash SPX traded in about a 5 point range which appears to be the smallest daily range since early March. It’s hard to understand what that was all about but it may as well have been a holiday. The other markets that I have been reporting on were relatively quiet as well with the one feature that interested me being that gold made a low at 1315.40 while the trend-line drawn up from the July bottom which I had mentioned in an update early last week had a value of 1317.44. The close was 1326.20 so the support there has held and as I mentioned earlier, gold is up strong again this morning.  

As a quick review, I believe that the 10-year has impulsed up from the low on 9/13 in what I suspect is either a completed 5^th wave - or just wave-1 of a still unfolding 5^th wave. I also think that the lows made a week ago Friday will prove to be just the A-wave of an eventual ABC correction and wave theory suggests that the C-wave will take out that A-wave low although that is not at all certain. Regardless I suspect that at best any rally here will prove to be only a B-wave and not make it back through the highs. As long as any pull-back in the 10’s holds above about 125-08, then I think it will represent wave-2 of wave-5 and the ensuing rally should be spectacular. Much deeper than 125-08, however, and it will look more like the impulse up from the 13^th - and possibly the bigger one from April - will have been ended. For now I am looking for the correction that began on 10/08 to complete no later than next week and perhaps by as early as later this week.

Looking at the 10-year and some of the indicators that I talk about from time to time, I see that volume on the break on Friday was well below average and actually one of the lighter volume days since early August. Oscillators on a daily chart are giving very mixed signals with the traditional stochastic heading down but my preferred cycle stochastic heading up; both being near mid-range. The weeklies, however, are both overbought but not yet turned down so I’ll just have to monitor them this week for any potential clues. What concerns me the most is that the short-term wave count seems to call for at least one more minor leg down before any further rally attempt is likely. That, coupled with the fact that the cash markets have now both come well through their trend-lines from April forces me to question any strength. I continue to think a large move will unfold from near current levels – one of at least 50+ bps – but I’m not yet convinced I know in which direction. While I can see the futures trading down into the lower 125’s and still recover, I’m not so sure that the cash charts can take another point to the downside and still look constructive. Heading into the week, my key levels will be 125-09 on the downside and that 127-08/10 area above. I know that a 2-point range is rather large but so too are the implications of breaking out of it. As things progress I hope to be able to get a clearer picture of just what is about to happen but for now, with Friday’s close near the middle of the above mentioned range, I just need more time.  

I continue to think there is still upside in the stocks with around 1203 as my minimum objective for the SPX. Last week was the 8^th week following the 1039 lows which were first made on 8/25 and it was also the 8^th consecutive week of higher highs. That seems to me to be begging for a correction but far be it from me to stand in front of a market that I don’t think has reached even a minimum objective – especially when it’s the stock market. Like bonds, stocks are giving mixed signals from the various stochastic oscillators I watch but the one I like the most, the cycle stochastic, is pointing up and still below mid-range. Of course volume on Friday, just like the daily range, was pitiful so hopefully that wasn’t a warning sign but since the index closed very near the highs of the move, I do want to see the volume expand on any new highs and with upside gaps likely today, this is exactly where the volume needs to pick up.

10/22/10 – 8:15 – While the markets didn’t move all that much yesterday, I think some important wave-based clues about what my lie ahead are beginning to surface. The rally out of the lows made last Friday was very choppy and corrective looking and remember that the highs in both futures and cash were right against their wave equality targets for an ABC correction. By virtue of trading through trend lines yesterday in futures as well as cash, the 10’s have now taken on the look of a market that needs to trade back down through its most recent swing low, the one made last Friday, before any further rally attempt is likely. Even a bullish count would now have the decline from the high on the 8^th as only an A-wave and not a completed ABC correction. Targets in futures for the C-wave begin at a 38% retracement target at 125-27+/30 (depending on whether or not you use night session prices) followed by a wave equality target at 125-20 and then their 50% retracement at 125-09+/13. Those are targets for a corrective low if the recent decline is correcting the rally out of 9/13. If that is the case, then as I tried to explain in Tuesday’s update, the ensuing rally would be wave-3 of the impulse from the 13^th and it should be spectacular with targets near 2%. (The only alternative I see to the 10’s testing one of those objectives still makes the decline from the highs an A-wave and the rally from last Friday a B-wave but one that is not yet complete. If the correction were a ‘flat’ then the rally could push up to the previous highs but that would be about it and a move back to Friday’s lows would still be likely. For reasons I won’t get into now, that does not seem to be to be the best count but regardless, the notion that a rally is already under way from last Friday cannot be supported by wave theory.) If one of those above mentioned retracement targets doesn’t hold however, then a move back to the 9/13 low at 123-05 becomes likely with only 123-24+ as a potential minor target above that area. From there, I could make a case for a rally that wasn’t quite as spectacular and one that wouldn’t necessarily carry with it targets in the 5’s and 10’s that might seem unrealistic. The real point to be taken from the wave structure as I see it is that if there is to be another rally from anywhere near here, it should carry the 10-year to 2% or beyond and if that happens, we’re talking about a move of more than 50 bps from here which would likely carry the 5-year below ¾‘s of 1%. Personally I’m having trouble believing that can happen. The 2 alternatives would seem to be a much deeper correction is in the works – or a top is in place. Now I’m looking at the short-term charts and they’re telling me that a break of nearly a point at the least is becoming likely and that tells me that this can be a very critical juncture. Don’t forget that the cash 30’s have broken their trend-line drawn off the April yield crest in spades while the cash 10’s broke theirs on Friday even if by only 2 bps and then yesterday they broke it again and closed right on it. That just can’t be ignored. The bottom line in here – at least for me – is that wave theory seems to suggest that a large move is pending one way or the other and if you cannot believe the10’s are headed to 2% and the 5’s to well below 1%, then you might ought to be thinking about a top of some degree being in place. What I’m thinking is that the next several days could be critical to the long-term health of the treasury markets and ones that should be biased to the downside so I think the risk is inordinately high.

The SPX traded higher but closed close to the middle of the range while Gold, Crude Oil and the CRB got crushed and the Dollar rallied though not impressively. I don’t want to focus on those markets, however, as I think the focus needs to be squarely on the treasuries in here as an explosive move up in prices – or confirmation of a top – may be at hand.

I’m posting a chart of the 10-year futures as well as the cash, each with Fibonacci retracement targets in red and each with their wave equality target for a potential C-wave from the best levels made on Wednesday in blue. The cash chart also shows the trend-line from April in magenta. While the futures chart still has room below to achieve objectives and still look ok, the cash chart is such that if the wave equality target is achieved, then all of the retracement targets will have been violated and the chances become much greater that the entire rally out of the 13^th will be erased.  

 <charts>

I know I’m repeating myself but I think it is important to keep in mind that based on my interpretation of the wave theory, the more bullish count that would have the pull-back holding at one of the targets on these charts would then suggest an explosive rally, one that I am having a lot of trouble believing can materialize in this current environment. Any lower close today will produce the third close in the cash 10-year through the trend-line drawn off the April yield crest and while it might seem that it would also produce a weekly close through the line, the fact is that when I construct the line on a weekly chart, the value for this week is actually 2.569 so that will be the real number that I think needs to hold on a closing basis. 

The first critical support in futures comes in at 126-02 while the first decent resistance remains at 127-08/10 but not wanting to give the market that much room on a Friday, I think I would go with minor levels and use 126-11+ as a stop on any long exposure and 126-31 for a stop on shorts. What I really think is the correct posture for today is flat, at least until one of those 2 minor levels is violated if not the more important ones. Now isn’t the time to get chopped up in my view as something big may be brewing.

 
10/21/10 – 8:15 – The action yesterday was of little help to me in deciphering the wave patterns. The 10-year futures traded a tick above the high from Monday with a trade at 127-07 taking them 1 tick closer to that 127-08+ wave equality target while the cash printed a low yield of 2.454 taking it just .001 though its’ equivalent at 2.455 but the initial break produced lows in both the futures and the cash that busted the pattern that had them in a C-wave from the worst levels on seen on Monday so those wave equality targets are questionable even if my otherwise resistance at 127-08/10 isn’t. I think I’d still be leaning in the bullish direction but ever since Friday I have felt that 127-10 needed to be exceeded for any sort of confirmation of a continuing rally and that’s still the case and right now I’d have to think that even if the 10’s do exceed 127-10, it will be in a B-wave rally. That would mean that while they would likely be headed much higher, the rally may be delayed a day or so while they gyrate within the trading range that has contained them since the highs on 10/08. A break of the recent lows at 126-02 changes everything but even a break of 126-19 would give me cause for concern and at that point I would no longer be biased to the rally side – at least not right away. I’m going to pretty much leave the analysis of the 10’s at that and give them another day to prove what they can or can’t do.

Stocks made a nice recovery yesterday regaining most of the ground lost on Tuesday. They still look to me to be headed higher although I have no evidence yet that the correction has, or has not, ended. Gold, Crude and the CRB had great days while the Dollar got hammered so the bigger picture was more akin to what has been happening of late, just not what happened on Tuesday when the bonds rallied and the other assets sold off.

10/20/10 – 8:15 – The treasury markets opened weak yesterday but found a bid in the first 20 minutes and never looked back. The low of the day in the 10-year came in at 126-12 which proves interesting in that now a secondary rally will hit a wave equality target at 127-08+ which is right in the middle of the 127-08/10 area that I felt was the resistance to use to determine if new highs would be forthcoming. The high yesterday was 127-06. If 127-10 gets exceeded on a secondary rally then I’ll have to assume that the rally that began yesterday is a 3^rd wave and not a C-wave and that the 10’s are headed back to new highs. Right now the move up from yesterday’s low looks as though it has seen waves 1 through 3 of an impending 5-wave move but that doesn’t help much since both 3^rd waves and C-waves are 5’s so all there is to go on is that target area of 127-08/10 with a good likelihood that it will be seen. A trade through 126-26+ in futures and 2.51 in cash would interrupt that pattern but it wouldn’t do much to the larger picture. Interestingly enough, the wave equality target for the cash 10’s would be 2.455 while the low yield yesterday was 2.457. If the 10’s are impulsing up, just how far up remains a mystery but all the way back to the December 2008 trough at 2.03 is not out of the question - in fact it seems likely. For one thing the 5-year exceeded that extreme and is still trading below it. But more importantly to me is the fact that the 10’s appear to have completed a 5-wave move from 9/13 so that would either represent a completed impulse wave or just wave-1 of a still unfolding one. And at Friday’s worst levels, the cash had retraced just over 50% of the rally while the futures retraced just under 38%. Any secondary impulse now should prove to be a 3^rd wave from the 19^th and if it is, then it is likely to be at least as large as the 1^st wave which covered 49.3 bps. Yesterday’s yield crest was 2.594 so an equally large move would carry the 10’s below 2.10 and they would still need a 5^th wave to complete the move.  Don’t worry if all of this sounds confusing as I will go over it again in a minute with a chart to help clear things up.

Another interesting aspect of the rally in treasuries yesterday is that for the first time in a while, they traded independently of the other markets I have been watching. Gold, the CRB Index and Crude Oil were all down hard while the Dollar experienced its’ biggest rally of the past 2 months. The SPX, which closed at 1166 shows some support at 1155 but the first really good support as well as retracement target is around 1129/31 so it might well be in for a bumpy road. I don’t have a good opinion of where gold might be headed on the upside if there still is any but the first support that I think is worth mentioning is around 1312 on  a trend-line that comes up a little less than $3 per day and then near 1300 on a retracement target followed by 1276. The Dollar Index has retracement targets at 78.97 and 79.85 and a really good looking trend-line currently at 80.67 coming down about .08 per day while the close yesterday was at 78.29. So at the end of the day it seems that stocks, gold, oil and the dollar may all have begun counter-trend moves while bonds remain the most difficult to call in here but that may not be the case for long.   

Below is the chart of the cash 10-year showing the potential impulsive count I referred to above. While the bigger count from the April yield crest can be interpreted in several different ways, what I am most concerned with is the move down in yields from 9/13 and the correction back up in yields that may have ended last Friday. I have labeled what I believe to be 5-waves down in yield from 9/13 where I have placed an ‘X’. As you can see, the second wave only took 1 trading day and part of another while the 4^th wave did the same. The move up in yields from 10/08, however, took 4 full trading days making it likely that it was a correction of a larger degree. It also retraced about 50% of the entire move giving it the appearance of a larger degree correction as well. That would seem to mean that whatever the impulse wave was that began on 9/13, it if isn’t a completed 5^th wave, then it must only be wave-1 of a larger move so from my perspective it all comes down to what happens from right around here. The 10’s can spend a few days in a trading range but if there is to be another rally, it should unfold very soon.  

 <chart>

 I mentioned above that the very short-term pattern calling for at least one more slight new high would be interrupted with a trade through 126-26+ and 2.51 which is where I see the futures trading right now. If those levels give way then it becomes more likely that if a larger impulse is to unfold, it will be delayed a day or two as the correction runs its course. It may well be that the move out of the 8^th (labeled ‘5’) is not a completed correction but rather just the A-wave and to complicate matters, while that move is a 3-wave move on a cash chart, the same move when viewed on a futures chart may well be read as a 5. It’s just too soon to know but not by much. I expect to see a resolution to the pattern reveal itself in the next several days if not hours.  

10/19/10 – 8:15 – All of Friday’s big moves were reversed yesterday but not erased. The treasuries, stocks, gold, crude oil and the crb index were all up while the dollar index was down. All of the reversals were impressive but none were conclusive as far as I’m concerned. I will say that most of those markets appear to be in corrections from the extremes seen last week although the one that offers the least amount of evidence of that is the one that I care about the most; the treasury market. It could be interpreted either way but the decline from the highs can be read as impulsive and so far the recovery has barely exceeded 50% in the 10’s and just over 25% in the 30’s. It’s just too soon to know.

One thing that stuck out about yesterday’s rally in treasuries was that it was not well subscribed to as far as the futures markets go. The 10’s traded less than half the volume that they had traded on Friday and for that matter less than on any of the 3 down days last week. In fact, I think it was the lowest non-holiday volume since 8/09. That was pretty much the case in the 5’s and 30’s as well. So with an incredibly strong trend in place but warning signs that it may be in jeopardy, do we go with ‘the trend is your friend’ or do we go with the warning signals? I don’t have a good answer for that one. While the cash 10’s broke through their long-term trend-line on Friday, it was only by a few bps and they are well back within it now. The 30’s remain on the bearish side of theirs so that is a ‘push’. The basis of my work is still wave theory and since the 10-year futures have always been my market of choice as far as wave analysis goes and given that they are the strongest of the markets that I watch, I should get an indication there as to what is happening before I get it anywhere else. My first clue is usually the wave structure and right now from the lows, the 10’s have a strong rally followed by several hours of sideways. Any secondary rally would either be the 3^rd wave in an impulse sequence or the C-wave of a correction and if that rally does not carry the 10’s back to their previous highs, then how they retreat will be the very best clue as to what my lie ahead. Wave theory says that a second wave can retrace nearly all of the preceding first wave so there is no absolute price that cannot be taken out short of the highs but I would normally look to the first strong resistance beyond the 62% correction; in this case 127-08/10. If that level is exceed then I would have to anticipate new highs, at least until the wave structure tells me otherwise.

While all of those other markets I mentioned traded higher yesterday, the real feature seemed to come from the SPX which not only traded to, but closed in new high ground for the move. While the oscillators there are overbought, I still see no objectives this side of 1203 (yesterday’s close having been 1184.71) while a test of the highs of the year at 1219 seems probable. Much like the treasuries, however, the volume there was not at all impressive and the notion that the stocks may still be in a correction even with the new highs yesterday is still plausible. The futures are down this morning and I won’t be at all surprised if this turns out to be a down day everywhere – everywhere except the Dollar that is.

I’m thinking today may be one of consolidation in all of the markets and want one more day of action before making any bold statements as to what they are actually doing. The stock futures are trading near 1170 with first real support closer to 1160. The Dollar Index is up strong this morning and nearing the highs made on Friday with first good resistance still about .50 away. Gold has taken out the lows made on Friday and there, the first decent support that I see is still is about $30 lower at 1325.

10/18/10 – 8:15 – An ugly day by any measure on Friday left the treasury markets looking like the entire rally out of the 13^th might be in jeopardy of being erased – and that could be just the beginning. That having been said, the 10-year futures have yet to retrace even 38% of that rally making such a bearish assessment seem a bit extreme but the cash 10’s traded through their 50% level and through their trend-line drawn from last April even if only by 2 bps and that is a concern.  While the cash 30-year won the race through the trend-line with a gap over it on Wednesday, on Friday not only did the cash 10’s break theirs but so too did the 30-year futures and there it was by more than a point and a half. Now even a bullish count in the 30-year would seem to suggest that they are likely to see the 9/13 lows re-tested which were at 129-05 (Friday’s close was 131-01) while the cash continues to look to me like it is headed to that 4.13/4.16 area – and those would be objectives for a correction assuming the 30’s are in an ongoing bull market, an assumption that I’m not so sure I would make right now. The cash 10’s still have quite a few good support levels left this side of the 9/13 swing but for the record, that was just this side of 2.83. With the 10-year having completed an outside down reversal on a weekly chart after posting an outside down day at the top and another 2 days later, everything seems to be pointing to the fact that the high made on Tuesday concurrent with that Fibonacci timing pattern is one to be very mindful of and right now the decline looks more like a 5 than a 3.  

While the bonds were getting clobbered on Friday, the stocks were pretty much holding their own. It’s a little early to know for sure but they appear to be correcting off the highs made on Wednesday. One discomforting feature is that the volume over the course of the past 2 days when they did in fact trade lower was better than it had been on any of the 7 consecutive rally days that preceded them. All of the oscillators I glanced at, both the proprietary ones and the more traditional ones, show a market that is overbought on a daily basis so at the very least a larger correction could be in the works but having found no good objectives between 1160 and 1200 and with the current high at 1184, I still have a positive bias.

The good news for the CRB Index is that it didn’t gap down on Friday and leave an island reversal above. The bad news is that while it opened steady and even rallied early, by the close it had lost 1.29%. Gold fell $17 while Crude lost about $1.30 and the Dollar had an outside up day gaining .52%. The bottom line is that all these markets seem to have reversed the trends that they have been in for months and while I don’t expect to see them all trade in tandem for long, for now there is just no good reason to think that they are not all overextended at the very least. This morning gold has extended its losses while the Dollar has extended its gains.

<charts>

The big break on Friday in the 10-year was accompanied by the highest volume it has seen since a big down day back on August 27^th. That’s just one more thing to be concerned about. If the only chart I looked at was that of the 10-year futures, I would be concerned based on the Fibonacci count at the top, the 2 outside down days last week, the high volume on Friday and the outside down week. That’s a lot to be concerned about but as eluded to before, so far they have only retraced about 34% of the rally out of 9/13 and that leaves them in a position to still recover and make new highs. The problem is the other charts that I prefer to watch have performed much worse of late and don’t offer the same bit of optimism. Actually the 5-year does but I hesitate to use it for confirmation of what I see on the longer maturities. Based on the breaches of the long-term trend-lines on 3 of the 4 charts that I use, I’m now of the opinion that it is likely that the lows from 9/13 will be tested on all of my charts - and likely exceeded on some.  Below are charts of the 10-year cash and futures side by side followed by the 30-year. I think they are worth a glance at just to get some perspective of how each looks relative to the others. The only feature that I am inserting on them is the trend-line drawn from the April top where this phase of the bull market began. 

The treasury futures caught a bid from the opening last night and made a bit of a recovery but they’ve given back much of it and the 10’s are currently up just a few ticks. For me it’s not nearly enough given the damage done on Friday. My first support area in the 10’s at 125-27+/30 is a good one but I hate to give up half a point for a stop following such a poor close. Still, that’s about the only one that makes much sense short of using a trade just under unchanged meaning 126-06. A similar situation exists on the upside with my first resistance being at 126-15/16+ and the next at 126-27+. In this case both are only minor levels but at this point I can’t see looking for much more than 27+ today and that may be a stretch. If a tight stop is to be used then I guess the first sell area is the one to go with. I personally think it’s time to stand away from any longs until some friendly clues surface while the safest way to get short is to let this first decline end and look for a rally into some real resistance to sell. The best risk/reward play that I can see for now would be to buy against that first and solid support area and use a trade just below it for your stop.

10/15/10 – 8:15 – Heading into yesterday I felt that ‘a little caution was in order’ but obviously I underestimated the danger. Much like the day before, an auction defined the trading day but this time it wasn’t in a good way. It was the long bond that was auctioned off and things didn’t go so well. Whereas on Wednesday the treasuries were at their lows at the 1:00 auction time and reversed up, yesterday at precisely 1:00 they were at their highs and reversed, ending up with outside down days and suddenly that little Fibonacci based timing pattern that I showed in my update on Wednesday that suggested that Tuesday might have been a swing high doesn’t seem so crazy. Also like on Tuesday when the 10-year traded right to the bottom of a gap and reversed, yesterday the cash 10’s perfectly filled the gap they had left on Wednesday morning before reversing. The 30-year, which hasn’t performed well since the 9/13 lows, now gives the appearance that yields could be on the rise with those objectives highlighted on the chart I posted yesterday around 4.13 not at all unrealistic – at least in my view. The 10-year futures can fall another point or more towards 125-10 without doing too much damage to their chart but the problem may come from the cash 10’s. While the 30’s broke through their trend-line drawn from the April yield crest on Wednesday, the same line on the 10-year chart has reached 2.573 - dropping just over a basis point per day - and if it gets breached too then the odds are pretty high that we are in for more than just a minor correction. Yesterday’s close was at 2.495.

The stocks had a down day as well but at least they recovered enough to close above the middle of their range so that chart doesn’t look nearly as heavy to me as do the treasuries. That said, with bonds and stocks and gold and crude oil and soybeans and just about everything that is measured by the CRB Index having gone up together recently, if one turns down it might just be a good idea to watch for the others to follow suit. On Wednesday the CRB gapped up and made new highs of the move and while the gap survived the close, the close was still lower than the opening. Yesterday they opened strong and made another new high but once again faded and closed below where they had opened even though it was a higher close. A gap down from current levels would leave an island reversal. Gold continues to make new highs and the Dollar continues to make new lows while crude oil seems to me to be in a sideways correction from the highs set last week.

One thing to watch out for today will be whether or not the 10’s can close above 126-05+ which was the low last week. They’ve experienced 2 outside down days this week to go along with the timing pattern and an outside down week would not be a good way to close out. Neither the cash 10’s nor the 5’s made new yield lows this week so those charts are not in jeopardy of having outside down reversals and maybe that means I’m trying to read too much into it but I feel like these markets have come too far not to respect any bearish warning signs. I’m still scratching my head trying to figure out why investors were buying 5-year treasuries at 1.07 last Friday.

I won’t repost the same charts that I posted yesterday and Wednesday but in their absence I will repeat the numbers that I think are important below even though they are all on the support and resistance table at the bottom of this report. The 10-year futures have good levels near 125-30 and again at 125-10/13 based on retracements while their trend-line now has a value of 125-08 coming up about 3 ticks per day. The cash 10-year has the trend-line mentioned above at 2.573 and there remains good support between 2.58 and 2.64. The numbers I still like best though are in the 30-year at 4.16 based on the 50% correction of move down in rates from April and then at 4.138 and 4.133 based on wave analysis. For the past several weeks It seemed like the whole world was buying all assets based on the notion that the Fed was about to begin their second round of quantitative easing but that old adage ‘buy the rumor and sell the fact’ seems to have kicked in.

 I would use 126-12 as my stop on any longs and 127-08 as a stop on any shorts as long as those levels have not been breached. I’d even consider selling into any rally that carries the 10’s up to 127-01 as absent a reversal of some degree today I would not want to be long over the weekend. I thought that Wednesday might have proved to have been a ‘disaster averted’ but now I’m not so sure.  

 
10/14/10 – 8:15 – When the 10-year futures didn’t gap down and leave an island reversal yesterday morning it seemed like a potentially bearish setup had been averted. Not so for the cash 10’s however, which did gap and leave an island on the opening and they gapped over a trend-line drawn off the 9/16 swing high as well. The cash 30-year hadn’t left a gap last week so there was no danger of an island there but they did gap open and that gap was over the trend-line drawn off the April yield crest defining the entire bull market rally and that seemed to be of real concern. Trend-lines are typically expensive to trade or trust but when one as prominent as the one on the 30-year is gapped over I find it difficult to ignore. Now factor in that timing pattern I showed in yesterday’s update and at the very least, a great deal of caution seemed in order. But then came a well-subscribed auction and the lows were in place. The ensuing rally pushed the markets to their daily highs right on the close and helped to erase much of the ugliness on the charts including the island in the cash 10-year. Amongst the best features to me was the fact that while the lows may have come as a result of the auction, the low of the day in the 10’s came in at 126-22+ while the ‘gap fill’ price was 126-23 and they were trading at 126-23 when the auction went off. The trade at 22+ eliminated any chance of an island and showed that there were still buyers willing to step up at good technical support levels. If I were watching that chart exclusively it would have been easier to be a buyer but looking at all of my charts collectively, it didn’t feel so good at the lows. I still think some caution is in order here but it won’t take much more upside to make it appear that the highs will not hold. The 10’s have already retraced more than 50% of the break from Tuesday’s high. The trade today is important in the sense that there are still gaps left in cash from yesterday and the 30’s closed on the wrong side of that important trend-line. Caution is still in order.

Stocks had a really good day even if they did give back about half their gains late in the day. The SPX still closed up about 8 points after trading above 1184. When 1158 didn’t hold, my objective moved up to at least 1203 and more likely new highs for the year above 1219 but with an area of concern at 1174. That area was basically gapped over yesterday and having been exceeded on the close, it probably offers no more problems. The volume was better than it had been since 10/05 and while it may not have been great, it hasn’t been for the past 6 months or so – the 50-day moving average of volume is declining – but that hasn’t kept the market from making some great gains and I guess now is not the time to start worrying about it. Stocks still look good to me.

And the other markets that I keep mentioning kept right on going in the same direction as they have been for months now. Gold gained about $22 to a new all-time high above $1375 while the CRB Index gapped up and close up another .64% while the Dollar was giving back nearly all of the ground gained since the lows made last week.   

I published a chart yesterday showing some targets below in the 10-year futures based on a trend-line as well as Fibonacci retracements. For now I’m not sure we need to be worried about the downside but I have little to show on the upside and just in case, the best levels below seem to be near 125-30 and again at 125-10/13 based on retracements while the trend-line has a current value of 125-04+ coming up about 3 ticks per day. Today I want to show you the yield charts. The first, the 10-year, has a trend-line drawn in red from the April yield crest that has a current value of 2.583, declining just over 1 basis point per day and there is also good support between 2.58 and 2.64. But if the treasury markets do continue to weaken from here, the second chart, the 30-year, has the most interesting area to view as a target, at least from my perspective. For starters the 50% correction of the entire move down in rates from April through August comes in at 4.160 shown as a dark blue line while the swing yield crest from 7/29, what Elliott might well call ‘the 4^th wave of a lesser degree’ and a great target using wave theory comes in at 4.138 shown on the chart as a black dashed line. A wave equality target based on the move up in yield from the August yield trough and the pull-back into last week comes in at 4.133 shown in red. Those are 3 very compelling targets about 25 bps away. I would pay special attention to the gap over the trend-line in the 30-year if it remains intact today and don’t lose sight of the Fibonacci based timing I put on yesterday’s chart that pointed to a potential swing high on Tuesday. That old adage that ‘the trend is your friend’ is a very good one to follow but it will never help you find a top or a bottom and while I am not trying to pick one now, I do want to stay ahead of the ‘pack’ at such lofty levels - if I can.  
 

<charts>

Yesterday may still prove to be a ‘disaster averted’ and in fact, that is how things look right now but I still want the markets to prove to me that the reversal from the high price on Tuesday was the head-fake, not the recovery yesterday. Right now I’m not so sure. For today I’d use 126-21+ as my stop on longs and 127-23 as a stop on shorts with a fairly neutral bias.

          
10/13/10 – 8:15 – Yesterday the FOMC minutes were released at 2:00 which probably explains why prior to then the trade was so light. Still, by the time the news hit the markets the 10-year had already failed from a 1-tick new high leaving a reversal on the charts. Technically it was an outside down reversal although that was based on the tiny range produced on Monday which I honestly don’t think we should even look at. Still, there was a reversal and there was even some timing for yesterday based on Fibonacci counts. It was 8 bars from the swing low on 9/30, 13 bars from the swing high on 9/23, 21 bars from the swing low on 9/13, 34 bars from the swing high on 8/25 and 55 bars from the swing low on 7/27 – consecutive Fibonacci numbers. The swing high on 6/07 was 90 bars back barely missing the next Fibonacci number of 89. I’ve seen patterns like that work before and while the one thing you can always count on is for them to end at some point, they are well worth paying attention to until they do stop working and especially when you get a reversal on a targeted day. I should have given a heads-up on the timing but must have fallen asleep at the switch. My cycle stochastic has been headed lower since 9/23 with only a few days where it ticked up. That could either be read as producing a series of bearish divergences warning of an impending top otherwise one would have to say that it was just not working. With gaps left on 10/06 still unfilled, a downside gap could leave an island reversal so that will be something to watch out for.  The volume yesterday was rather low and not at all indicative of a meaningful reversal so I’m not yet too concerned but again, that was at least partially a product of the general lack of trade prior to the 2:00 FOMC news. These markets have come too far not to be concerned about any reversals let alone one that comes with any sort of timing associated with it.

The SPX traded lower for most of the day but got a boost from the Fed news and ended up with an outside up day, again one to be careful of given the slow nature of the trade on Monday. The cycle stochastics there are overbought and at the highest levels seen in a month.  Volume was abysmal for most of the day but with the FOMC news and the ensuing rally, it picked up considerably and by the close was at least respectable with most coming during the rally. I haven’t mentioned the TRIN system I plot in a while so here is the latest. After having covered 3 short positions with a small loss on 9/20, it established 5 long positions - the maximum position it is built to take on – between 9/20 and 9/29 and took profits on them on Monday while establishing an initial short trade. It put on a second yesterday.  I don’t agree with the idea of getting short here but that system has a better track record than I do so we’ll just have to see which of us is right. Remember it is a mechanical system that is built on the TRIN which is an indicator that uses advancing vs. declining issues as well as advancing vs. declining volume.

When I look at a chart of either the 5 or the 10-year, I have no problem seeing them as having 5-waves up from the 9/13 low but without any great deal of confidence that it has completed. That is reason enough to respect the reversal even if I weren’t going to get short. The 30-year has become so drastically different that I hesitate to use it at all when trying to determine where the 10’s are headed but it certainly adds no positive evidence to the mix as it has been far weaker than the shorter maturities for quite some time now. If the 10’s gap down and don’t recover enough to fill the gap, I would not be too quick to initiate any new long trades since an island reversal on top of the daily reversal and the aforementioned timing would likely attract sellers for at least several days or more.

I’m including a chart of the 10-year that zooms in enough for you to see the reversal as well as the Fibonacci retracement targets of the rally out of the 13^th of September. It also shows a trend-line drawn off the April bottom as well as having the Fibonacci numbered bars I eluded to in the first paragraph highlighted in red, yellow, blue, magenta and black. Finally, I included the cycle stochastic. What it doesn’t show is the gap from 126-23 to 25+ since this chart includes the overnight sessions but that area, from 126-23 to 126-25+ is very important as far as I’m concerned. If it is violated and especially if it were to occur on an opening gap, then only the 125 area would stand between here and 123 and perhaps much lower.

10/08/10 – 8:15 – Some violent reversals of trend occurred yesterday in several markets that I will address later in this report but the 2 that I remain most focused on, the treasuries and the equities, had fairly quiet and uneventful days. Oddly enough, the entire range that captures both the openings and closes for the past 2 days in the 10-year is a whopping 3 ticks – 127-02 to 127-05 – each day creating a nearly perfect ‘doji’ on a candlestick chart. I don’t see a need to go into any discussion of technicals since it would be meaningless by the time 8:30 rolls around.

I built the 3 charts below shortly before the close yesterday so the last trade on them is not the closing trade. For the purposes of these charts that doesn’t really matter since I’m posting them as a guide to where the markets might find support if the reaction to the numbers is a negative one. The truth is that when I look at a 10-year chart I get the sense that they it is in a 4^th wave correction which would be followed by a new high and if that is correct, then the retracement levels on these charts will not be the correct ones to look for - but then the markets would be headed back up so it wouldn’t really matter. In the event they do head lower, however, these 3 charts of the 5, the 10 and the 30-year futures show the areas that I will be watching for. If the top is terminal then they may not be such good levels although I’d have to say that it looks to me like the 50% correction in each should be worth a pretty good rally in any scenario. The light blue ellipsis highlight gaps on the 5 and 10-year and those will likely be the first line of defense drawn by the bulls. To be sure there are other areas to be mindful of but if today marks the beginning of a correction, it won’t likely mark the end so these are just meant to be guidelines.

<charts>

While most of the commodity markets were up yesterday morning when the report went out, something happened early that hasn’t happened in a while. They reversed. Gold never went back to the 1366 high it had printed overnight and traded down to 1326.50 before closing at 1336.60. Crude Oil hit 84.43 before turning around and turn around it did. By making a low at 81.00, it missed by just one penny of trading with 5 handles before closing at 81.65. The CRB reversed from a sharp new high while the Dollar Index managed to recover from sharp new lows but it closed only marginally higher and not even as high as where it had opened. Time will tell if these were true reversals or just pauses in ongoing moves but the one thing that strikes me is that none really hit any objectives of mine so as large as some of the reversals were, for now I’m viewing that as being a function of just how far these markets had come of late. That’s not actually true of Oil since I had no real objectives there.

If the reaction to the news is muted and the markets trade in any orderly fashion - and I personally don’t think that is so unlikely – then I would use 126-21+ as my stop on any longs and hopefully for the last time as I am getting as tired of saying it as you probably are of hearing it, I would trail any rally with a 9-tick stop.

Shortly after the release of the news this morning I will be headed out of town and am not scheduled to return until late Monday night. I trust I will have time to do a normal update then but if not, one will be forthcoming as soon as is possible. Have a great holiday weekend!

10/07/10 – 8:15 – So what’s not to like about a day when 10-year yields fall 7½ bps to the lowest levels they’ve seen since January of 2009 while 5-year yields fell 4.2 bps to an all-time low yield – at least for my lifetime? Well, nothing as long as they don’t gap down this morning. The fact is that for the day session both the 5’s and 10’s closed at their worst levels of the day and in the case of the 5’s, they pretty much had opened at their best level. If you looked at either on a candlestick chart, you would see a negatively colored bar and for good reason. It’s never a good thing to see a market close at a worse level than where it had opened. Yesterday it looked like a setup for an island reversal on a downside gap today but at least right that doesn’t appear to be in the cards. I’ve felt for some time now that if those two instruments would trade to those two barriers, that would be the time to exit longs and I’ll stick with that notion for better or for worse. The backup was probably the result of traders looking to get a head start on profit taking in front of Friday’s report but as far as the these markets have come of late, it’s difficult to know how they’ll react to the numbers even if they prove to be good ones and the fact that the jobs data comes at the front end of a holiday weekend makes it even more difficult to judge what might happen. Aside from the worrisome look of yesterday’s bar, the 10’s were still up nearly half a point on better than average volume and in a strong trending market. The Bollinger Bands that I addressed yesterday widened further while the Cycle Stochastic dropped precipitously enhancing the bearish divergence but at the same time dipping low enough that on any weakness they will likely reach into oversold territory quickly which could help to support a case for yet another rally. Picking tops or bottoms is difficult and usually expensive and at least until we get past Friday morning, there’s just point in trying.

Stocks closed marginally lower yesterday but other than that it was business as usual. Gold was up another $8.60 to $1351/oz and has already traded at 1366 this morning. Crude Oil was up another .40 to 83.24/barrel and has traded over $84 this morning while the CRB Index was up .73 yesterday which more than filled the gap that had turned it back on Friday. Need I tell you that the Dollar got slammed once again closing down almost ½% yesterday and is down nearly that much already today. Friday may be a key date for many of these markets since they all seem to be trending together although the Dollar is running opposite to the other markets. If the treasuries trade back up through yesterday’s extremes, then what’s left for resistance are the previous highs in the 30-year futures at 135-19, a little less than a point away, followed by the August yield trough in the cash long bond at 3.462 – 20 bps away - and then the 2.03 yield trough made by the 10-year in December of 2008. I have 3 nearby objectives in gold derived using Fibonacci extensions that fall between 1378 and 1386 with 1382 being the best (remember it has touched 1366 overnight) while the CRB Index has major resistance at 293.75 to overcome (closed yesterday at 289.15) before I will project it up much further. Finally, the Dollar Index has powerful trend-line support at about 76 (it has now traded to 77.05) followed by major support at 74.17 and a wave equality target at 73.26. So there you have some solid objectives for everything from ‘soup to nuts’.

I want to at least get past today  before trying to read too much into yesterday’s action but one thing for sure is  that the levels achieved in the 10’s and especially in the 5’s can prove to be very meaningful. I’ll post some charts tomorrow with, hopefully, some nearby targets to watch for on a good reaction to the news but again, I don’t think that there are any to rival those that were overcome yesterday. I should at least be able to identify some good supports to watch for as well. I entered the week thinking that stocks were the key and they still can be. My objective of 1158 in the SPX was based on anticipating a rally from the August lows that would cover about 120 points and so far it has covered 124. Friday can impact stocks in a big way so I would not rule out a failure from these levels but if the rally extends now, it will probably extend considerably.

As mentioned before, the good news today is that neither the 5’s nor the 10’s appear to be going to gap down. I still rather doubt they will be bid up to new highs again and think we will see either a very boring trade or some further profit taking. We do get the weekly ‘claims’ number this morning but that’s about it in the way of news. The most obvious support in the 10’s will be in the gap left yesterday so I would be using a trade below the gap-fill number of 126-23 as a last ditch stop if I were still long anything when we got there.  

      
10/06/10 – 8:15 – The feeding frenzy continued yesterday as just about every market I watch rallied. The 10-year futures continued pushed into new high ground one again while the cash 5-year traded to 1.197, just about a bp from the 2008 yield trough. The SPX broke through my 1158 target printing 1162.76 and closing at 1160.75, gold was up $25, crude oil hit $83/barrel and the CRB Index was up 1½%. Only the Dollar missed the party as it got clobbered once again. The CRB Index, having regained 89% of the ground lost off of the January top should by all rights go higher and at least test those highs and gold seems to be accelerating which is indicative of some sort of a 3^rd wave and it is showing no signs of slowing down and of course the bonds have looked like they needed to trade higher for some time now. Even the SPX has looked like it was headed higher for some time now although having reached my target last week, I didn’t have a good feel that it could continue; but to see all of those markets rallying at the same time is not something that I would have imagined would happen. And it didn’t end yesterday. Overnight the 5-year broke through the yield trough it established during the darkest days of the financial meltdown in December of 2008 and is currently trading nearly 2 bps through that level while the cash 10’s are only about 2 bps from their August yield trough. The S&P futures have made new highs as has Gold while the Dollar has made new lows. How long can this go on?

As far as the treasuries go, it’s difficult to say. While the 5’s and 10’s were making new highs of the move, the 30-year closed lower on the day yesterday posting a new record wide spread to the 10-year. Volume in the 10-year improved over Monday’s but it was also greater in the 30-year on the down day and it was way off yesterday in the 5-year. Something I don’t normally mention, Bollinger Bands which are essentially standard deviation bands, have gotten extremely wide and the treasuries are hanging very near the upper band. There is no reason why they can’t continue to advance as the bands advance but typically standard deviation bands are pinched tight just before moves begin and extreme widening can be an early warning sign that the move may be nearing an end. The Cycle Stochastic currently shows a large bearish divergence even though it is headed higher and that seems to suggest that a failure is coming unless the 10’s can continue to rally enough for the oscillator to confirm. There appears to be a 5-wave move up from the 9/13 lows and while it doesn’t have to be completed, given the other indications I just mentioned and the close proximity to the August yield trough in the cash 10’s and the December 2008 yield trough in the 5’s – as well as the close proximity to the jobs report – I think it may be time to back away from the long side unless your plan is to ride out the jobs numbers on Friday. That’s not a call for a down market but I feel like the risk at these levels heading into the numbers is getting extreme. The chart below shows the cycle stochastic as well as the Bollinger Bands and it doesn’t take much imagination to see a 5-wave move out of the 13^th.

 <chart>

While the trend in treasuries is clearly stronger than it is in equities, the potential warning signs I see in the treasury markets are not showing up in the SPX. True that 1158 target has not been cleared by enough to abandon it altogether but if it gives way then I think the next good objectives are above 1200 and the same 2 indicators shown on the 10-year chart above that give cause for some concern don’t seem to be as much of an issue for the stocks. The deviation bands have actually narrowed during the past week or so while the cycle stochastic is mid-range and headed up as you can see in the chart below.  

<chart>

Of course none of this may matter much come Friday morning at 8:30 but as things sit right now the treasuries look like the more overextended market. If the cash 10’s can clear 2.419 along with the breach of 1.185 in the 5’s, then maybe we can begin to look for the 30-year to head back to the low yield it hit in August but right now, that is still 25 bps away which may be asking for too much. When a market trades to a new all-time high, there is never any telling when or where it will stop but I’ll be surprised (not for the first time) if the 5-year can sustain these levels since from the trough in 2008 when there seemed to be a much greater amount of fear in the markets, it reversed and headed back to 3% over the course of 6 months. I don’t have any better targets to sell against save for a print at 2.419 in the cash 10’s so my call is to – you guessed it – trail the market with a 9-tick stop.  

  
10/04/10 – 8:15 – On Friday I was mostly focused on the SPX for my read on the bond market but this morning bonds are up strong once again and stocks are only slightly softer suggesting the bond market may not need help from stocks to make new highs. With or without any help, the treasuries look like they need to go higher with ‘how much’ seemingly the only real question. If you remember from the counts I showed on Friday, one called for potentially an incremental new high while the other paved the way for a significant extension of the rally and while the 10-year futures had already cleared the highs they made back in August, the cash 10’s as well as the 30-year have not and in a typical impulse wave they should. The reason I thought stocks were the key was that on Thursday the SPX came within 1 point of the  target I had come up with in early September before reversing. If they had been in an upside correction since the 7/01 bottom, then that would be the best area from which to expect a complete failure while a clear break above it could pave the wave for a substantial rally, possibly to new highs for the year. Following the break from Thursday’s highs, I felt that ‘around 1150 would be the key’ and the high for the day on Friday was 1150.30 but with the close just 4 points below there, it’s just too soon to know if they’ve started down or just taken a breather. Meanwhile, nothing happened in the 10-year to prove or disprove either of the wave counts labeled on the chart posted on Friday but they did at least trade above 126-05+ which was the level that needed to be breached to make an impulsive count to the downside impossible to make. Essentially we’re right where we were after Thursday, looking for new highs with only ‘by how much’ in question. And ‘by how much’ may well be a function of the stock market.

There were a few other features worth mention regarding the other markets I have been addressing of late. The CRB Index which has been in a very strong rally since mid-August made a sharp new high before reversing and closing lower. The really interesting part was that the high was at 288.93 while back on January 12^th, it left a gap from 289.15 to 288.58. It’s funny how gaps left that long ago still matter to traders but apparently they do - this one sure did. The Dollar Index continued its’ recent meltdown plunging close to 1 full % and it still shows no signs of bottoming although a good support area at 77.69 is rapidly approaching; the close having been at 78.09. Gold made another all-time high, the 13^th since it broke above the June high on September 14^th while Crude Oil was printing nearly $82 a barrel. Maybe the reversal in the CRB will prove to be something but absent that it is very difficult to understand why there is still talk of deflation and why the Fed continues to reiterate that inflation is not a concern. I’m not suggesting that the Fed is wrong but the prices of a lot of commodities are going up and that is not debatable.

I don’t have a lot to add to what I said or showed on the chart I posted on Friday. Wave theory says treasuries are still going higher although several alternate wave counts can still play out while stocks have reached what I believe to be a critical juncture and the very short-term charts suggest at least one more break is due similar to the 21 pointer that we saw on Thursday. A lot can happen in the next several days but with the jobs data due out on Friday, the markets could also just go into holding patterns at some point. I suspect that treasuries will make new highs prior to Friday and if they do, I may be able to eliminate one of the 2 counts I showed on Friday based on wave structure but we’ll still have to get past Friday morning for a true read.  

Since I think stocks are so critical in here and without anything really new to show on a bond chart, I thought I’d post a chart of the SPX with the wave count that would have me so concerned if I were long stocks – or short bonds. From the June top I have labeled what I think may be waves 1 through 5 down to the low in May. From there I have also labeled and ABC correction that would have ended in June at a point where the C-wave was within pennies of where it would have been equal to 1.382 times the A-wave. That measurement is made in blue on this chart. From there the index made a new low on July 1^st but I think it is possible that the new low may have been a ‘X’ wave which Elliott used to describe what he basically called a ‘failed impulse wave’ which would be followed by a second ABC and that is the one that had a measurement to 1158.03 as you can see on this chart in red. Remember that Elliott said that C-waves frequently equaled A-waves otherwise they should be related by a Fibonacci ratio – in this case in the first ABC the C-wave would have been equal to 1.382 times the A-wave while in the second it would be exactly equal. It is a compelling picture and until it is proven wrong, I just cannot dismiss it.

 <chart>

So this morning the 10’s are set to gap higher and in fact they are currently trading right up against the previous highs of the move. A good aggressive stop could be placed at 126-07 while 126-00 would be the last trade I would want to swallow while still long. On the upside it’s business as usual meaning just trail the market with a 9-tick stop or if one cares to sell into strength, then the only 2 places I would think would make sense would be against the August high in the cash 10’s at 2.419 otherwise against the all-time yield trough in the 5-year at 1.185, now less than 5 bps away.

The decline in stocks from the highs yesterday has all the appearance of an impulse wave but to see that, you have to look at a 5-minute chart and risk ‘not seeing the forest for the trees’. The test will come around 1150. Above there and another assault on the highs becomes likely while a break below yesterday’s low would project the index down another 15 or so points. Even that won’t end the prospects for still higher highs. For me, that will only come if they can post a larger 5-wave decline which won’t likely happen before next week and next week brings the newest round of jobs numbers which could prove to be the determining factor behind the next move, in whichever direction it develops.

While all of the fireworks were going off in the treasury and equity markets, Crude Oil was closing above $80 for the first time in a while, the CRB Index was making a new high of the move, the Dollar Index was making new lows of the move and Gold was making another new all-time high. Since 9/15, the day after Gold breached its former all-time high established back in June, it has made a new high on 12 of the 13 trading days with the lone exception being a day where it matched the previous days high. There was no shortage of features yesterday no matter what market you were watching.

As far as the 10-year is concerned, the low tick yesterday was 125-10 while the 38% retracement of the rally out of the 13^th was at 125-07. That’s pretty close and merits attention since one way to count the 10’s has them having completed a 5-wave advance at the recent highs and following a 5-wave advance, a pullback to the 38% retracement target is what one might expect to see before another rally similar to, if not larger than, the first which in this case covered 3 points and 10+ ticks. There is another way to read the rally, however, and that is that we have only seen waves 1 through 3 of the impulse wave and yesterday marked the end of the 4^th wave. That would suggest only some marginal new high and I would think that in that scenario, those targets of 2.419 in the 10’s and 1.185 in the 5’s would be great levels. In that count yesterday’s low was just 2½ ticks through the 50% correction of what would be the 3^rd wave so either count has its’ merit. Below is an intra-day chart of the 10’s with both of those counts shown as well as both sets of retracement targets. The red lines are the retracements in my first scenario while the blue ones are for the latter scenario. I apologize for what is certainly a very busy and ugly chart but hopefully you can wade through the noise and see what I am talking about. I should point out that the retracement levels shown on this intra-day chart are a little different than those you get if you look at a daily chart which includes overnight sessions. That accounts for the large cluster of support numbers shown in the support and resistance grid at the bottom of this report, where I use both measurements. As far as I’m concerned this thing can go either way which is why I’m so concerned about stocks.

<charts>

As promised yesterday, below are monthly charts showing more than 5-years of action in the Dollar Index, 10-year yields and the SPX. My conclusion is that there is no clear and useable correlation but I’ll let you be the judge.

 <charts>

Being a Friday and following yesterday’s gyrations, today could be prove to be much quieter although there are numbers this morning. I still think things are pretty critical in here and would play my hand close to the vest – at least to the downside. I would use a 125-23 stop on any longs but think a more aggressive approach can be taken on a rally looking for at least 126-12+ to sell against. If the stocks were to turn down, using that ‘9-tick trailing stop’ would probably not be a bad idea either.