^_Tbondtrader

9/30/10 – 8:15 – The treasuries soften a bit yesterday on some decent volume though it was lower still lower than during Tuesday’s rally. The range for the 10’s was just 11+ ticks, hardly enough to read anything into but as strong as the up-trend has been, that’s a good thing. Yesterday’s report showed charts of the 10’s and mentioned the potential 5-wave moves to the highs and that still can prove to be a problem but yesterday did nothing to change my outlook which remains guardedly optimistic that we will still see higher prices. A bid has entered the markets overnight and the 10’s are set to open close to the best levels they’ve seen during the rally. And virtually the same can be said for the S&P which traded lower but on less volume than on Tuesday and in a very tight range. They’re off a couple of points this morning but there, too, not enough to mean much. I hesitate to try and read too much – or anything at all for that matter – into a day as quiet as yesterday. 

So without a lot of changes to the bond market analysis for today, I thought I would make good on a promise made a few days ago and do some further work on the Dollar Index including the posting of some charts. While I typically use standard bar charts, I thought I might start this discussion by posting a monthly and a weekly chart for some perspective as to where the Dollar has been and for those I’m using Candlestick charts since I think they do a better job of displaying long term data. Below left is the monthly and to the right is the weekly. The bars are painted red when the close is lower than the open and green when the opposite is true.

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As you can see from the monthly chart, from 2002 to 2008 the Dollar got hammered, losing about 35% of its value.  What I’m more concerned about is what has happened since the low in March of 2008 which can be seen on the weekly chart. I’ve labeled that chart showing a potential impulse wave from the March 2008 low to the March 2009 high and while I’m not sure of that count, there is some evidence that it is the correct one; most notably the fact that what I have labeled as ‘wave 4’ retraced 62.8% of my ‘wave-3’ which is close enough for me to respect as having met Fibonacci objectives. That and the fact that both waves 3 and 5 can be sub-divided into 5-wave moves themselves along with the strength of wave-3 makes the count more than just possible. If that is the correct count, then from the high in March of 2009, the Dollar may have done an A-wave down and a B-wave back up (also labeled) leaving it in a C-wave decline that should complete the correction. Wave theory suggests in a ‘flat correction’ that the B-wave will generally go back to the high of the impulse wave and in this case, it recovered just over 94% of the break which is also close enough for me to accept, especially given the size of the suggested A-wave. My favored objective for now would be where the C-wave would equal the A-wave (wave equality target) which would occur at 73.26 shown on the chart preceded by the ‘100%’ label so that is my first objective- but not my last. Now I turn to the daily chart below.

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So with the 10’s set for another strong opening, I’m still faced with the problem of not having any great nearby levels to work with. The only good support in futures is more than a point below yesterday’s close while I have no good resistance anywhere near here. I doubt the previous highs will hold so if I were inclined to sell into strength, I guess I would go for my second resistance area at 126-25 but the fact is that the only areas that seem within range today that really matter are 2.419 in the cash 10’s or 1.185 in the cash 5’s, both about 10 bps from yesterday’s closes. Support is even more difficult to deal with but here again trailing the market with about a 9-tick stop is not a bad idea. That would allow you to start the day with a stop below yesterday’s lows and that is not a bad idea either.

9/29/10 – 8:15 – A breakout in the 10-year futures on heavy volume and strong rallies elsewhere in treasuries seems to suggest that the rally out of the 13^th is indeed an impulse wave and if so, it could still have plenty of room to move – could being the operative word in that sentence.  The cash 10’s have now come within 3 bps of the trough made on 8/25 although the 30’s remained 18 bps away at their best levels. The real feature for me came from the 5-year which managed to produce its’ lowest yield in modern times with the exception of the day of the yield trough on 12/17/2008. I have long wondered what might happen if that level were tested again and it looks like I’m about to find out. The SPX, meanwhile, came under some heavy selling pressure early but rebounded nicely to produce an outside up day with the highest close it has seen since 5/13. Since the 9/13 low in the 10-year, it has rallied 3½ points while the SPX has advanced about 35 points. It really isn’t difficult to understand why stocks might rally if interest rates fall but it does continue to beg the question ‘where could rates go if stocks were to break to the downside’. The Dollar Index continued to get hammered even producing an outside down day and it looks to me like it is still headed much lower. I have objectives near 74.90 – the close was 78.96 – with the lows from November of 2009 at 74.17 not unlikely.  Gold gapped down and traded about $10 lower at 1286.40 before reversing eventually and trading as high as 1311.70 – a huge outside up day – while the CRB Index was pushing to new highs of the move as well. All told it was a pretty impressive day for everything – everything but the Dollar t that is.

 If there is any follow-through today then we might be faced with the cash 10’s trading to the yield trough made on 8/25 at about the same time that the 5’s trade at their yield trough from 2008. While the trend clearly remains up and strong, those areas still represent exceptionally good resistance and need to be watched closely. Even if all they do is produce a pull-back initially, funny things can happen from such prominent levels, especially one as prominent as is the case in the 5-year. An interesting set-up has developed in the 10-year where the cycle stochastic has still not achieved the levels seen last week. That sets up a potential bearish divergence if the markets fail before that oscillator can catch up.   

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Additionally, you can easily see even from these daily charts that the rally out of the 13^th has all the characteristics of a 5-wave move. It can push higher and what now looks to be waves 1 through 5 may very well prove to be just a component of a larger advance but the point is that now there is a 5-wave move to new highs on my 10-year futures chart which is clearly the chart that I prefer to use for my wave counting. If the cash 10’s can push through the previous yield trough at 2.419 and especially if the 5-year can clear its’ yield trough from 2008 at 1.185, there’s just no telling how far these markets can run. One could speculate that if the 5-year could make it back to the December 2008 extreme, why not the 10-year?  That notion notwithstanding, any apparent failure from those areas will need to be monitored very closely.

The 10’s are trading a little lower this morning. They’re currently just a tick above my first support area but it is only minor support as are all of my supports there for more than a point. For a stop on long positions I would use a trade below my second support at 125-24. I also have no good resistance in futures for more than a point so like yesterday, on any rally I would trail the market with a 9-tick stop. I would, however, be aware of the previous yield trough at 2.419 should it be tested and have my finger on the trigger if that area seems to want to hold. I’m not yet ready to strategize for short positions but that can change in the near future.

9/28/10 – 8:15 – A strong performance by treasuries yesterday saw them open near the lows and close near the highs. The 10-year futures fell just 2 ½ ticks shy of the double top highs at 126-02+ although cash underperformed slightly. The 30’s closed right up against a trend-line drawn off the top and our new friend, the 5-year, fell shy of the highs from last week but with a stronger opening, left a gap that could help to support things on any pullback. The 30’s closed up more than 1½ points while the 10’s were up nearly ¾’s. If there was a downside from my perspective it was that volume was only about 70% of what was done on Friday when the markets softened considerably. The cycle stochastic has turned down so it may prove to be a setup for a bearish divergence but that’s speculative at best. While I had said yesterday that I doubted that a 3^rd attempt at 126-02+ would fail, that’s speculative as well and until we push through that area – and is some respects not even then since all of the other markets have yet to reach the equivalent – this rally can still prove to be just a B-wave. Below are charts of the 30-year cash, the 10-year cash, the 5-year cash and the 10-year futures just to show the relative placement of each vs. the previous best levels seen on 8/25. As you can see, only the cash 5’s at the bottom left have made a new low yield while the 10-year futures to the right have matched their previous price high.

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The SPX made a new high of the move but only by about 1 point before backing away. The pullback was only about 8 points in what was an exceptionally low range day. The volume was off from Friday but with the new high and the lower close, there is now a reversal on the charts. It doesn’t look like much yet but I remain nervous given the close proximity of the highs to my targets at 1158 so I would remain cognizant of the stocks, especially if I were short bonds.

Gold has continued to push to all-time new highs on nearly a daily basis while the CRB Index has exploded over the course of the last few days to levels not seen since early January. Meanwhile, the Dollar Index continues to get hammered trading yesterday to the lowest level since early February. I’ll try to show some charts of those markets in the next several days.

One more feature in the treasury markets worth mentioning is that the spread between 30-year yields and 10-year yields, which had reached a record 125 bps on 8/10 before narrowing to a more reasonable 103 bps on 8/26 – still near previous historically wide levels – has given back 75% of the narrowing during the recent rally leaving the 30-year nearly 25 bps from its’ 8/25 yield trough. I had always thought that the strangest part of the widening before was that it came amidst much talk of deflation and while that talk still persists, with Gold and the CRB Index in very strong rallies, that spread once again may be suggesting a greater fear of inflation on the part of some investors.

Very early this morning the 10-year printed 126-02 but for the third time, while they made it to 126-02 they couldn’t make it to 126-03. I imagine that the buy stops above 126-02+ are building and will at some point be triggered and while it would be nice to be aboard when they are, I still feel like I did yesterday and think that this is an area where tight stops are in order. The problem is that I don’t see where to place one any higher than 125-16 unless you just trail the market with a 9-tick stop. That’s probably the best idea and in fact that would be my plan for selling even if we don’t see any weakening first. I don’t think selling into strength against those highs makes good sense any more so on a rally I like the idea of a trailing stop.  

9/27/10 – 8:15 – A soft day on Friday had me concerned but the bid has returned overnight and the treasuries seem to still be on course for higher highs. The 5-year, the market that had me the most concerned, sold off again Friday but it didn’t trade through 1.40 leaving the impulsive pattern still intact and it closed higher for the week making Thursday’s reversal stand out as the only really ugly feature on any of my charts – at least so far. The 10’s made a low on Friday at 125-05 which was still above the first number that I felt needed to hold, 125-01+, so things are still ok there as well and 124-21 remains the only must-hold number with regards to the current rally. The 30-year gave a bit of a scare when it traded down to 131-21 while the ‘must hold number there was 131-20. While I prefer to use the patterns in the 10-year to guide me, If that low gives way then the only way that both the 10’s and 30’s can retain the same wave count will be if the 10’s trade down so in some respects today’s bid couldn’t have come at more opportune time. From a bigger perspective, one that begins at the highs on 8/25, it still seems obvious that we have yet to see the best levels of the move since the decline cannot be read as impulsive but we do seem to be in a 5^th wave from the October lows and therefore, in a very mature part of the bigger impulse wave leaving the markets vulnerable to just about any unexpected influence. If they do head lower from here and break those ‘must-hold’ levels below Friday’s lows, then I would expect to see the 10’s trade back to the lows made on 9/13 at 122-30 while a good target for the 5-year would be about 1.60. The reason I’m suddenly bringing up the 5-year is that it, along with the 10-year futures, made a near perfect double top against the 8/25 extreme (the 10’s were perfect) and that makes them represent the best examples of a flat correction leaving them with the clearest targets. The target for the C-wave of a flat is back at the point of inception of the correction meaning at the extremes from 9/13. Below are the charts of the 10-year futures and the 5-year cash. The red horizontal line on each marks the number that must be the end of wave-1 if they have been in an impulse wave from the 13^th and therefore, those are the levels that must hold if we are to see new highs before the lows from the 13^th are tested again.  

Friday saw the SPX open strong and never look back, eventually closing right up against the previous highs from Tuesday at 1147. My ideal target for the completion of a corrective pattern from the lows made back in July remains just above 1158 and while I can’t say for sure that is what the SPX is doing, I want to be very careful if that level is approached and right now it appears as though it will be. Friday produced the highest close since 5/13 and the highest weekly close since 4/30. If the 1158 area doesn’t hold, then only 1170/1175 stands in the way of another test of the April top near 1220.

This week will almost certainly reveal whether the treasuries are impulsing up or still in a correction even though while this Friday is the first Friday in October, it appears that the jobs data will not be released until the 8^th. Still, if the action from Thursday’s high is a 4^th wave then it shouldn’t last much beyond today if it hasn’t already completed. At Friday’s lows, the decline from the top had lasted 8 market hours while the correction from the high on the 15^th to the low on the 20 also lasted 8 market hours. Wave theory teaches that alternating waves are frequently equal in time or price so from a timing perspective, if Friday’s lows hold there is evidence that those 2 declines may represent a 2^nd and a 4^th wave.  Likewise, if the 1158 target in the SPX is going to do its’ job, we should find out in the next several days at the latest. Yes, this could prove to be a very telling week.

With the early strength this morning, risk management in the 10-year is a little more challenging since 125-01+/03 remains the only area that concerns me. I would again use 125-00+ as my stop on longs while looking to sell against 125-26+. If that area is exceeded, then following the market with a 9-tick stop would make sense to me since I doubt the resistance at 126-02+ will hold if it is tested for a third time. In fact, simply using a 9-tick stop is not such a bad idea either. The strength this morning is coming while the stocks are trading higher so there is no certainty in my mind that the bid will persist but right now things look pretty good.

9/24/10 – 8:15 – Just a few features to yesterday’s trade in the 10’s that I think merit mention; the futures perfectly matched their high at from 8/25 at 126-02+ before backing away - and at the worst levels of the day the futures narrowed the gap they had left on Wednesday by a single tick while the cash narrowed its’ gap by just .002. That’s about it. The closes were a tick better than the day before in both 10 and 30-year futures although I would be remiss if I didn’t mention that the cash 10’s closed a little less than a bp worse than on Wednesday. The only reason I think that is worth mentioning is that it came from a new high of the move and on an outside day so by itself it stands as a reversal. The fact that the futures closed better as did the cash 30’s seems to make the reversal a weak one at best. That having been said, there was one chart that produced a reversal worth noting. The cash 5-year posted another new low yield of the entire rally that began in April - actually one that began in June of 2009 for the 5-year - and it had a much more pronounced outside bar with a close pretty much at the worst levels of the day. This is the second reversal from a new low yield of the year in as many days and just makes you wonder if the short end of the curve really has much left in it. I keep thinking that with the ‘doomsday’ yield low printed in December of 2008 now just 7 bps away in the 5’s, at least traders have to be wondering if there is really any room left to rally. Even with the reversals though, the chart, shown below, still shows a picture of a market that has only rallied in a 3-wave move since the yield crest on 9/10 and that is not how an impulse wave should end (remember that my cash charts are off by a decimal point on the scale). For the record, 1.396 is the level that must hold prior to a new low yield if the rally is to become a 5-wave.

The SPX had a wild day that began with a downside gap and a low at 1123 in the first 5 minutes followed by a recovery that carried the index back to 1137 by noon before a secondary sell-off produced new lows just before the close. I can’t read the decline in stocks as impulsive and until I do or until they trade quite a bit lower, I will expect another rally but I must remind you once again that the SPX achieved about 92% of my objective there and on an interesting day for a change of direction. The cycle stochastic, which seemed to know a correction was brewing by heading down since the 13^th, pushed lower still and is well oversold but with no divergence or anything to suggest a turnaround is imminent. Volume was high yesterday and in fact, it was the second highest volume day since 9/01, one day out of the lows. I’ll need more time to figure stocks out but as far as I’m concerned, they’ve come close enough to a good objective for me to have no interest in the long side of them from here. 

The Dollar stabilized but still appears to me to be in trouble. The CRB recovered from the big break yesterday and looks more and more like it is in a correction following the very strong rally that began back on 8/25 suggesting another strong rally may be in the works while Gold punched out a new high by .20 printing $1280.

The 5-year has me a little scared and the gaps left on Wednesday can prove to be more of a liability than an asset if they were to be gapped over. Perhaps they hold today or even get filled before a recovery but I hate to see them left exposed just below a close. I still like the wave patterns but I think that this is an area where your hand needs to be played close to the vest. With the gap-fill price just 4 ticks below yesterday’s close, that might be a little tight for a stop but if you don’t care to use it, I wouldn’t put mine any lower than 125-00+ while trailing any rally attempt with a 9-tick stop.

9/23/10 – 8:15 – Just like on Tuesday the treasuries gapped up yesterday but unlike Tuesday’s gap, yesterday’s were never filled – at least not during the day session. The markets weakened last night and traded below them but they’ve recovered this morning so on my ‘day session’ only charts, they are still intact. There’s only a one tick gap in the 10’s, 3 ticks in the 30’s, but they might still provide some support on a pullback. Although the markets softened into the close yesterday, I still think they are in an impulse wave up but they are likely only somewhere in a 3^rd wave with a multi-day, 4^th wave correction still necessary before a top can be seen. Only a trade below 124-21 would confirm that the entire rally out of the 13^th was just a B-wave so for now there is some degree of risk associated with holding for new highs but they should be forthcoming sooner or later. The volume was good yesterday providing one more clue that this is an impulsive rally. The resistance in futures is apparent to anyone with a chart or just a good memory as the previous highs of the move were 126-02 while yesterday’s high was 125-30+. At the best levels of the day the cash 10’s were still about 8 bps from their previous extreme while the 30’s were still about 25 bps away and since an impulse wave should carry to new highs, simply looking for a new high in the 10-year futures may not be giving the rally enough credit – nor would it truly confirm that it is an impulse. The cash 5-year made a new low yield of the move out of the 13^th so that enhances the impulse interpretation of the rally. The 5’s have now retraced 95.4% of the entire move up in rates that began in December of 2008 in the midst of the financial meltdown and I continue to wonder just what may happen if they can trade at that level again. The low yield yesterday was 1.268 while the low in December of ’08 was 1.185, about the same distance away as the cash 10’s are from their yield low on 8/25.

Stocks softened a bit further from the highs made on Tuesday which proved to be a ‘key reversal’ day since the close was lower following a new high of the move but the pull-back was not enough to break the up-trend by any measure short of using very short intra-day charts. Yesterday’s break was accompanied by good volume and that, coupled with the fact that the high came one day before the equinox will keep me focused on it, especially since the high print was 92% of the way to my objective for the entire move out of the 1040 low on 8/27. The 1158 area is simply one of concern for me and having been nearly achieved with some timing, it merits more than just a little respect. This morning the futures are down about 8 points in early trading which should place the cash around 1126 while support should be found near 1123 and 1114 but the first retracement objective of any sort is near 1107.

Below on the left is a chart of the 10-year futures with the 2 wave counts that I am currently monitoring. The move from the top on the 25^th down to the bottom is clearly corrective but could be either a completed ABC correction or just an A-wave. If it is a completed ABC, then the count from the lows has us in a 3^rd wave with the 5^th wave highs not likely before well into next week at the earliest. If the low is just an A-wave low, then the rally is a B-wave which should be a 3-wave move and may have completed yesterday or will complete somewhere close to those highs. The only way we’ll know is if the futures trade back below what I have labeled ‘Wave-1 or A’ at 124-21 since a 4^th wave cannot trade into the range of the 1^st wave in any impulsive sequence. On the right is the chart of the cash 10’s which counts out the same but as you can see, they are relatively further away from the extreme they reached on the 25^th. They would have to trade back through 2.661 to violate the impulsive look that is developing.

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While I still think the highs are ahead of us, since this could still prove to be a B-wave rally with a high at or very close to current levels, my plan going forward would be to try and tighten up stops, especially if the futures trade at 126-02. That having been said, there isn’t much support to work with other than the area of the gap left yesterday morning so I’ll use 125-13+ as a stop while looking to lighten up any long exposure against 126-02. If the 10’s can trade at that level, I would also move up a stop on any additional long exposure to about a 9 tick trailing stop. If the equities break hard, that could prove very rewarding.

9/22/10 – 8:15 – The treasuries have once again found their bid and in a big way with the 10’s having come within ¼ point of their previous highs in overnight trading. The FOMC meeting apparently dominated the early trade yesterday since by and large, there was none. The ‘king’ of liquid contracts, the S&P e-mini futures, traded in about a 3 point range for the first 4 hours which is less than 1/5^th of a normal daily range. During the same time frame and following an upside opening gap, the 10-year managed to stay in an 8-tick range. Most of the speculation was that the Fed would acknowledge that the economy was weakening but with no consensus as to how they might address it. That might explain why the treasuries had an upside bias in front of the news but it’s a little more difficult to understand why the SPX would have been down just 3 points most of the day after being up 17 the day before - especially if there was real concern about economic growth. Of course, with the worry about economic growth comes renewed talk of further Fed accommodation so that must explain why stocks and bonds might both like the same news. At 2:15 we found out that there was no change in rates - no surprise - but market activity picked up as the statement was digested. The Fed stated their intent to ‘re-invest principal payments’ off of their balance sheet holdings convincing the markets that they have opened the door for more quantitative easing. The 10’s broke hard on the initial news, down to 124-09 after having spent the entire day with a low at 124-18+, but within minutes they were back above that level and 15 minutes later they were making new highs on the day up against their trend-line drawn off the top and it didn’t take long before that line gave way as well. The SPX also initially broke on the news and printed new lows of the day but it also quickly recovered and 15 minutes later it too was making new highs. This morning the treasuries are poised for upside gaps – close to a point in the 30-year and nearly ½ in the 10’s while stocks are trading a few points lower.

For me, the feature of the day was the 10-year trading though the down-trend line drawn off the 8/25 top. I thought that would seal the deal with regards to the lows being in place which now doesn’t seem like much of a call given that they are already trading more than 1½ points off the lows made after the news was released yesterday afternoon. I can now label the lows on the 13^th as either the point of completion of an ABC which seems likely otherwise they may prove to be just the A-wave low. If the latter proves correct, they would fail near the previous highs and work their way back down to those lows but in either case, new highs of the move should be the end result. The important thing from a wave perspective is that any B-wave rally will be a 3-wave affair so now it is all about counting waves. A trade back under 124-21 before one above 125-02 would suggest that the B-wave is the more likely count but right now it appears otherwise. The cycle stochastic I watch has become significantly overbought on a daily chart but the weekly shows it having just turned up from oversold, as you can see on the 2 charts below. Collectively they seem to suggest that should there be any sort of a correction, the bigger rally may then gain some momentum.    

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Volume yesterday picked up dramatically and was well above the 50-day average; exactly what you would want to see on a trend-line break (if you’re long) and that might just be the best feature of the day. The Price Proxy which I have mentioned and posted numerous times before entered the day yesterday in a sell mode but it switched to a buy on the opening. I don’t want to imply that it gave a buy signal since it should probably be read on a closing basis and of course, having gone to a buy on the opening at 124-20+, it remained that way on the close at 125-12. Not liking to use any more indicators than are absolutely necessary, I’ll just say that the wave patterns are near-term friendly if not outright short-term bullish while most everything points to higher prices. Only the oscillator on the daily chart appears overbought and potentially vulnerable but the weekly would make it seem to be only a short-term vulnerability. One thing that I should clarify is that it is entirely possible that we have been in a 4^th wave correction so once this impulse ends, everything - and I mean everything - could change. If this is a 5^th wave rally, it could end the bigger move that began back in April. Finding the top could get tricky since yesterday the 10-year futures closed less than a point away from the highs with the cash still about 18 bps away. The 30’s could offer up even more confusion since there, the futures closed well over 3 points away from the top while cash was more than 30 bps away. Nonetheless, I will look for an impulsive structure and once I think I can find the end of a 5-wave move from the lows made on 9/13, I will get very defensive regardless of whether or not every chart I watch has made a new high. No problems now though as even if this is the impulse wave, the final top should not come before next week.

As far as stocks go, let me start by saying that while I enjoy the analysis, since stocks and bonds don’t currently seem to be trading off of one another, the stock market analysis hasn’t seemed to fit into this report lately since the report is intended to be all about fixed income. That said, I know that while the 2 markets don’t have to be related in any way when stocks rally, they are very likely to be inversely related if stocks sell off hard and that day may not be so far away. One thing I remain mindful of is the fact that I had long ago come up with an objective near 1160 (the real number is 1158.03) knowing full well that 1130 was going to be a problem. Having cleared 1130, I don’t want to fall into the trap of getting complacent about the ‘1158’ projection. Every time that I mention it I think to myself that we may never get there – or we may not stop if we do. It is simply an objective and the patterns need to be monitored on a daily basis. Consider that the high yesterday was 1148.59 which was just about 9 points from the actual objective or about half of an average day’s range. Yesterday the futures closed lower on higher volume than the day before after having made a new high of the move. The daily cycle stochastics have been headed down since 9/13 – don’t ask me how – while the weeklies are overbought as you can see from the 2 charts below. From my perspective just about anything can happen in here so I will be watching stocks very intently for at least the next several days.

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The CRB Index has backed away from a new high for the year posted on Monday, Gold printed an all-time new high yesterday and the Dollar Index is getting clocked and seems to me to have a fairly substantial move down in front of it once it breaks the lows made back in early June. It has already retraced 95% of the rally from those lows and even if they hold this time down, wave theory would seem to suggest it would only be a temporary reprieve.

One last thing to mention is that today marks the official end of summer and beginning of fall; the Fall Equinox. I don’t do astrological analysis but I have often pointed to important timing for the 3^rd week of March and the third week of June as those time frames almost always have an impact on the financial markets. Those are the Spring Equinox and Summer Solstice dates while the third week of December, the Winter Solstice, and today are secondary but still can be found to create market turns although not as reliably. Reversals in here in any of the markets need to be respected but given the patterns I would be most concerned about a reversal in stocks. I told you this would be a full report.

One thing that is happening is that good support and resistance numbers are getting fewer and further between. The only number that would tell me to back away from the long side of the 10-year is 124-20, clearly too far away to use as a stop, while absent evidence that this rally is a B-wave, I’d want to hold longs until the highs are exceeded.  For today I think using a trade below yesterday afternoon’s highs at 125-14+ as a stop makes sense as that will fill the opening gap and could pressure the market somewhat. Should the rally extend beyond the opening, I think trailing the market with a 9-tick stop makes sense although selling against 126-02 would probably not be a bad idea.

9/21/10 – 8:15 – In my last full update which I did on Thursday I had said “I find it difficult to say this but for now, I think both stocks and bonds are headed higher”. Well, that’s exactly what has happened. The move in treasuries has not been all that impressive, at least not yet, but the SPX cleared the resistance that had been holding it back since May and seems to be well on its way to my 1160 objectives. It really wouldn’t be hard to make a case for even higher targets but the 1160 area should be a good one and for now I’ll stick with it and see what transpires when and if we get there. As far as the treasuries go, the decline continues to look like nothing more than a downside correction in an up market, so much so that it seems like it is just a matter of time before they catch fire. While there is still no real confirmation that the lows have been seen, both the 10’s and the 30’s pushed through trend-lines yesterday drawn off the highs of 8/31 and 9/01 respectively and with the values of those lines even lower today - at 124-07 and 130-07 - even a lower close could produce the second close through those lines and that could prove important. As it is we’re set to open with up-side gaps.

I do see that the volume has not been all that good in treasuries since I left last week. Friday wasn’t bad but yesterday was way off and that leads me to wonder if they might not just be in a B-wave rally now, ultimately headed a bit lower before the next strong rally commences. The cycle stochastic is getting pretty overbought even if the more traditional ones are not and there is still an overhead trend-line in the 10’s drawn off the top that has now reached 124-30. My guess is that if there are to be lower lows during what I still will call a correction off the top, I would suspect that they will come from no higher than that trend-line.

As far as stocks go, the rally there came with a little better volume pattern and I find that encouraging. I still feel that looking for both stocks and bonds to rally together is a tough thing for me to get my arms around but if the equities can get a big push and make their objectives before the treasuries crack, that concern could evaporate.

With a really late start last night I’m going to abbreviate this report again for today but promise to post a more complete one tomorrow with charts. While resistance remains at 124-21 which may get tested early today, it is more important at the trend-line just 9 ticks above there so I would use a trade above 124-20 as a sign to be on alert for a failure but I’d really like to try to hold out for a trade up at 124-29 if I could. I would also use a trade below 123-30 as a sign to back away from any long exposure but if the markets remain firm for the next half an hour, then a trade below 124-15+ would fill an opening gap and that might just prove to be an early warning sign of further weakness. This afternoon we get an FOMC statement and things could be pretty sluggish until then and I’m not certain that flat isn’t the correct posture afterwards. 
           

9/16/10 – 8:15 – Some real 2-sided volatility was the story yesterday. Following hard downside gaps that carried the 10’s just a tick and a half shy of their 38% retracement of the Monday & Tuesday rally and the 30’s through their 50% retracement, both markets recovered all of those losses and in fact the 10’s actually made a new high before a secondary sell-off carried both markets back near the lows. When I recalculated the retracement targets for the 10’s from their new high mid-day, the late sell-off carried them right to the new 38% level. The 30’s would appear to be in their C-wave decline but with the new highs in the 10’s, they would seem to be in just their A-wave. I’m sure that when the next big move unfolds, they will go in tandem but for now I’m just not sure which one is flashing the correct signals. Even if both trade lower and the current retracement targets don’t work, everything that has occurred since the top can only be read as corrective when one applies wave theory meaning another rally should unfold.

From Tuesday’s highs in the SPX, the patterns are equally corrective looking and while the resistance up to 1131 is so visible as to be unmistakable to anyone who cares to look at a chart of that market, I still think it is only a matter of time before the index breaks above that area. Volume was good yesterday, better than the 50-day moving average, and that too is a positive. Remarkably, the cycle stochastic that I showed yesterday, moved even lower while the SPX pushed higher which could be a warning sign or maybe it’s making room for the next push up. Of course PPI and CPI today and tomorrow can interrupt the patterns but from a purely technical perspective, I feel pretty good about the prospects for further advancement in equities. One caveat is that there remains a gap from the opening on the 13^th, nearly 15 points below but even that wouldn’t be enough to turn the pattern negative.

As far as treasuries go, volume there was fairly high and while some of it can be attributed to the strong intra-day rally, it was still a sharply lower close so that is a negative. Since the highs, there have been 9 down days and 6 up days. The average volume on the down days is about 1.4mm while the average for the up days is about 1.2mm so it isn’t all that lopsided and at the end of the day, the 10’s are still trading less than 2 points from the highs following a rally that has spanned about 13 points. As much as they have run well beyond my initial expectations, I still see the treasuries as correcting from the highs and if that’s true, then the ultimate highs have yet to be seen.

I will be traveling tomorrow and again on Monday so I’m sure when I will be posting my next update. I suspect that I will do one for Monday morning but with inflation numbers both today and tomorrow, a lot can happen between now and then so I’m going to post a few charts with targets below. I find it difficult to say this but for now, I think both stocks and bonds are headed higher although I think that either one could experience some backing and filling. The way I look at retracement targets, if one gets violated then I will look to the next. It doesn’t always work out that way but it is the best rule of thumb that I can offer, especially if I can’t be around to try and read the wave structure. I am currently looking at retracements from the June lows which are drawn in blue but if the 50% levels don’t hold, then I’ll look to the bigger retracements, those from the April extremes drawn in red. I especially like the areas where the 2 different retracements basically overlap. I apologize for the size of this file but the only way to have a handle on these markets is to watch both 10’s and 30’s, cash as well as futures. The two charts at the top are the 10-year with the 30’s below. With the 10’s still about 2 points from their highs, I don’t yet have any great targets should they catch a real bid but they should run into some real problems in the upper 124’s to the lower 125’s and again just below 126. You can see all of those levels at the bottom of this report. If they have begun a new impulse up, I doubt the highs could be seen before the middle of next week but if yesterdays’ highs are exceeded, then I would look for the 10’s to trade well into the 125 handle. Good luck.

9/15/10 – 8:15 – The treasuries followed their upside reversals on Monday with strong follow-through yesterday, once again opening near the lows and closing near the highs. The 10’s have recovered 49.75% of all the ground lost since the top 15 days ago in just 2 sessions and yesterday’s rally did come on increasing volume. It still wasn’t great but it is improving and the truth is that too much of a volume spike might be suggestive of more of a short-covering rally than one driven by fresh buyers. At this point the rally can easily be construed as impulsive although it is way too early to confirm that. While we may have seen the end of a correction on Monday morning, it also could prove to be just the A-wave. If that were the case then there will be a secondary break but I think that the important thing to be taken from a wave perspective is that the decline appears to be either a completed ABC or just an A-wave but not an impulse wave so for now, it seems that we will still see higher highs although I must add that it is too soon to put a time frame on them. While the 10’s did fill the gap they had left on the 9^th, they didn’t quite make it up to the trend-line that I had mentioned in yesterday’s update so that will be the next barrier of significance and keep in mind that the value of that line comes down nearly 4 ticks each day, having now reached 124-16, yesterday’s high. The 30-year lagged a bit having recovered 38% of the break and has for its’ trend-line a value of 131-20 – also yesterday’s high. It’s actually pretty odd/interesting that each maturity made a high yesterday at today’s values for their trend-lines and it is equally odd that one retraced 50% of the decline while the other retraced 38%. One thing that does seem to be saying is that yesterday’s highs are not fairly critical to the near-term health of both markets.

It seems that more often than not when bonds are rallying stocks are heading lower but yesterday stocks closed about unchanged after having made new highs of the move. The volume was a bit lower than it had been on Monday but with a basically unchanged close, it’s hard to read too much into that. The high on the SPX was just over 1127, the same as on 8/02 which was the first day during a 7 day stretch when the index traded between there and 1130 on 6 of the 7 days so it is fair to say we have reached into that resistance area that I have been loosely referring to when I’ve mentioned the resistance at 1130. While the more traditional stochastic oscillator shown on the chart below, the top oscillator, continued to move higher into overbought territory, my preferred cycle stochastic in the lower pane turned down rather abruptly and it will be interesting to see if that is a precursor to a retreat from these levels. I wouldn’t be surprised to see some backing and filling against such obvious resistance but I still think that it will be exceeded.  

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Gold had an explosive rally yesterday closing up nearly $24 at a new all-time high while the CRB Index had a second consecutive strong day and basically matched the highest levels it has seen since January and considering that much of the talk during the rally in treasuries was about deflation, it is odd that both gold and the CRB would have had such strong days at the same time bonds were rallying. It appears that when the bond bulls are on the loose, they don’t really care which way any of the other markets are headed. The Dollar weakened dramatically and appears as though it may have begun a new leg down. We’ll have to keep an eye on it.

This morning things are off to another puzzling start. Treasuries are set to open lower and so are stocks. Maybe it’s a good thing that those markets are less focused on one another although I don’t know for sure what they are focused on. If the rally in treasuries has been impulsive, then a pull-back can be expected to test Fibonacci retracement targets and below are charts of both the 10’s and t he 30’s with those targets posted on them. They don’t have to be tested but it is still too soon to know just where we are in a wave count so I think it’s a good idea to be patient and wait for entry spots on any trades that allow for good risk/reward. Selling against yesterday’s highs would be one such trade as would be buying against a reasonable support target.

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I’m still of the opinion that the decline in bonds has been corrective and that means we need to be prepared for another run towards the top while at the same time, I still think stocks are headed higher near term but have to overcome some very obvious resistance. I don’t have a good time frame for either to occur just yet so I would be in the mode of taking good risk/reward trades and waiting for more clues to come which for me will likely be in the form of the structure of any pull-back in either market. Beginning this morning and extending throughout the rest of the week the economic calendar gets pretty active, highlighted by inflation news tomorrow and Friday. The picture off the top says we should be looking to the long side but the picture off the bottom says not just yet. The numbers could certainly change things but right here, right now, I have no clear ideas for a position trade. As you can see below, I felt there was good support in the 10’s at 124-07+ which is just about where we are trading right now. If it gets breached I wouldn’t be too quick to play the long or the short side but would expect a choppy market for the day but that call is based on a very short-term pattern and the eco news may change things from that perspective. Patience should be a virtue in this environment.

9/14/10 – 8:15 – Just what the Dr. ordered; a full blown turnaround – or is it? For starters there’s a strong reversal following a downside gap to a new low of the move finishing with an outside up bar complete with the open at the lows and the close at the highs. The 10’s and 30’s both closed the downside gaps left on Friday and are set to attack those left earlier last week. The first thing I like to look to at times like these are where the lows come in and while 3 of the 4 charts that I focus on showed nothing much at yesterday’s lows, the cash 30-year perfectly nailed a trend-line which I had isolated as a strong support point at 3.918. While the lows may not have been at any Fibonacci targets as I like to see, that trend-line touch is enough to keep me focused on yesterday’s lows. From a timing perspective I did find some evidence for a turn yesterday but nothing nearly as compelling as what I had seen for the week of the top and from the standpoint of oscillators, I see that my cycle stochastics as well as the more traditional ones were overextended but they have yet to show any signals based on divergences or even by just changing direction while my Price Proxy was still pointed down on all of my charts – at least that was the case yesterday. This morning we’re faced with fairly strong upside gaps and it they can survive the day things will look pretty strong. One thing that didn’t happen yesterday was that the volume didn’t really return in the way I had expected it to. In fact, you have to go back into August prior to the top to find a day with lower volume so that is perhaps the only negative I could find to the rally but that could change with the burst today. If the rally fails and any subsequent decline is accompanied by stronger volume, I would get out of the way in a hurry but one more thing that I can’t get out of my head is despite the fact that from the highs, the treasuries experienced the largest pullback since prior to the April bottom when the 10-year yield was at 4%, the decline has never resembled an impulse wave in any way. Today the 10-year is likely to attack the gap left on 9/09 that fills at 124-10 and possibly the overhead trend-line at 124-20 and while both of those areas should offer solid resistance, there is just no way that the patterns can become impulsive looking so other than selling against resistance with a stop just above it, I’m finding it very difficult to initiate or stay in short positions.      

The stocks opened with a strong burst, faded into the lunch hour and then firmed up into the close and they still look good to me although there too, the volume was not quite what I would have hoped for. It wasn’t bad though and was still an improvement over both Friday and Thursday; both rally days. While the high in the SPX remained a few points shy of the massive resistance area near 1130 that has turned back that index on multiple attempts, the futures traded very close to the equivalent highs made back in August and even as far back as 6/21. Since the futures have been trading at a discount to cash, one that evaporates the closer they get to expiration, it isn’t really surprising to see them reach those previous highs in front of the cash markets so it is fair to say that the equivalent of the 1130 SPX resistance area is currently being tested. I think it will be exceeded but everyone may not agree so I expect to see a struggle develop from these current highs. Should the SPX ultimately clear 1131, then I think they have another 30 or so points to go and the treasuries will be challenged to retain this sort of a bid if that were to occur but even if this rally proves to be just a B-wave, one scenario that fits well with the corrective look to the decline, that would still suggest another test of the highs at some point in the not too distant future.

The first real test for the treasuries will be when the trade into those gaps left on 9/09 at 124-08+/10 in the 10’s and at 3.759/750 in the cash 30’s and then again at the aforementioned trend-line. While the volume wasn’t that great yesterday, it may have been a product of the rally since if the big money players want to be sellers, they would likely have waited out yesterday’s push looking to get in at better levels. That’s not a prediction but rather an observation. They still may find themselves forced to re-examine that sort of strategy. I still want to a pickup in volume one way or the other.

I realize that everyone doesn’t look rely on wave patterns to the degree that I like to but I still thought that I would post a daily chart of the 10-year as well as the 30-year just to show the overall pattern from the highs. I have included only a trend-line drawn over the highs with a parallel line under the lows which I think helps to see the degree to which the decline seems to have been contained pretty well within a channel. Remember for there to be an impulse wave in any direction, there cannot be a lot of ‘overlap’ within the waves since there should be a large 3^rd wave and as well as a 4^th wave that fails to enter the span of the first wave. It should be fairly apparent that there is just no way to make an impulsive count with those 2 tenets in mind when you look at these 2 charts.

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I would use a trade at 123-27 as my stop on any long trades and wouldn’t tolerate a trade above 124-10+ with a short position. Hopefully today will be accompanied by a solid increase in volume and give a more clear direction to the move from here but if the wave theory is to hold true, even if the decline resumes it is likely to prove to be a corrective one prior to at least another solid test of the highs.

9/13/10 – 8:15 – Once again the treasuries traded lower on Friday and once again the volume was not all that bad leaving scant evidence that the break was over and the weekend brought little relief. Overnight the 30’s have been down nearly a point and the 10’s almost a half although both have rebounded somewhat. The opening on Friday produced the second downside gap in as many days in the 10-year and we may well see another this morning and that too is disturbing. The cash 30-year traded through its’ trend-line anchored back at the yield crest in April and all of the markets posted lower weekly closes which may be contributing to some of the selling this morning. I’ve been thinking that we will see an increase in activity this week and only then could we really trust what was going on but as I mentioned, the volume in bonds has not been all that bad during this decline despite the holidays so there was really no reason to treat it with any suspicion. When viewed on a weekly chart, the volume doesn’t look all that impressive but one has to consider that it was a 4 day week with the Jewish New Year having been celebrated on Thursday and Friday so that’s not much for a bull to hang his hat on. I’m still down to having one and only one positive bit of input and that is the fact that at least the initial break off the top failed to develop into a 5-wave move but it is looking more and more like if we are in a correction, it may be a correction of a large degree, likely one that is correcting all that has happened since April and that would suggest that the 10’s are headed through 3%. The cash 30’s traded through their 62% retracement of the move down in rates from the yield crest on 7/29 at 4.138 leading me to the same conclusion there. And if you’ve noticed, everything that I have suggested so far assumes that the treasuries are in a correction of some degree but what we really need to worry about is that the entire rally could be done in which case rather than correct what has happened since April, we could just erase it. For now, I’ll push that discussion to the back burner but it isn’t something that I can just ignore. It does seem unlikely to me though given my longer-term bearish feelings about the equities but that, too, can change so I want to take things one day at a time.

The SPX had another up day on Friday but while the volume there was an improvement over Thursday’s, it was still not very impressive. It was an up day though and that’s what really counts. This morning they have a strong bid and are likely to open with a large upside gap and I’m guessing that this time, the volume will be there. Absent a reversal on increasing volume, the case for another test of 1130 is increasing and as you know my feeling is that the next test will be a successful one on the way towards 1160.  

If the treasuries could have only gotten some traction last night, there was an interesting area in the 30-year futures at 129-22/23 that I could have seen stemming the decline. If they were in a correction of anything less than the entire rally from April, then the only 2 alternatives seem to be a correction of the move out of the 7/13 low otherwise it would be a correction of the rally from 6/03. There were already reasons why I doubted that the former was true but still it contributed to an interesting convergence of support numbers. On the chart below, I have drawn in the Fibonacci retracements of the rally from 7/13 in blue as well as the retracements of the rally from 6/03 in red. As you can see, 50% of the rally from 7/13 was retraced at 129-23 while 38% of the move up from 6/03 was retraced at 129-22 making that 2-tick range really interesting. I like using that sort of analysis to determine just where we are in a wave count. Since that should have been a great support area but it appears to have had little effect, it makes the notion that we are retracing the move up from 7/13 rather unlikely since not only was there little impact from the 38% number but now it appears that the 50% had no impact either. That would seem to point to the next logical target being the 50% correction of the bigger move out of the 6/03 low which is at 127-28. If you’re thinking ahead, if that area doesn’t hold then the first retracement target of the entire move out of the April low is at 126-19. Below is a chart of the 30-year futures updated through last night just to illustrate that support area which it appears will be gapped over this morning.

With that area having given way, my attention is drawn to another similar convergence of levels on the 30-year cash chart shown below. I think we can already rule out that this is a correction from July leaving the best 2 possibilities being a correction of the move from 6/03 otherwise it is likely we are correcting the bigger move out of April. Shown below are the retracements of those 2 moves and there again there are 2 levels very close to one another. The 62% correction of the move out of 6/03 is at 3.991 while the 38% retracement of the move from the April yield crest is at 3.995 giving us another great area to watch were it to get tested.

With the ugly break this morning in the treasuries – and it’s getting uglier by the minute – I am again forced to use a stop that is pretty far away from the close on Friday. There is mild support at 122-28 that could be used but the better support ends at 122-21 so a stop at 122-20 makes a lot more sense. Were we to start back up in the next few minutes and open at 123-05 or better, then the same stop used on Friday at 123-04 could be used but that is pretty aggressive. On the upside, a gap gets filled at 123-19 so that figures to be the first real obstacle and a good sell area. If the 10’s can make it through there, I would just trail the move with a 9-tick stop.

   
9/10/10 – 8:15 – Just a miserable day in bond land, one that saw the treasuries under pressure from the start. The 10-year futures gapped down and eventually traded through last Friday’s lows but by just a single tick before stabilizing or perhaps a more correct statement would be ‘before they closed’. That and the fact that the 30’s and cash markets remained above those lows are about the only positives I can find. The 30-year cash also left a gap. The volume, which I would have guessed would have been very low, was in fact higher than it had been on Wednesday and the close in the 10’s was the worst since 8/09. The channel on the 10-year that I had shown on charts for the past 2 days was broken on a closing basis, although the seemingly more important trend-line on the 30-year chart was not quite reached so perhaps that’s another positive although unless/until the markets can recover, I think calling that a positive is a stretch. The fact is that the price action in bonds continues to disappoint if you’re a bull and one could only hope that next week will bring the return of a more complete deck of players including those who might be able to turn things around. I’m not so sure though since for now, the only real positive that I can draw on is the fact that the decline does not appear to be impulsive - yet. One thing that I would like to see if I were long would be a recovery today so that the 10’s wouldn’t finish the week on the wrong side of that channel line. For today the values are 2.736 in cash and 123-24+ in futures while the critical trend-line in the 30’s is at 3.866.  

The SPX rallied to a new high of the move but there, the volume was more like I thought it would be. As of 4:00 p.m. the S&P futures had traded just 1,064,000 contracts vs. their 50-day average of 1.877,282 so I really would like to see the highs taken out on at least an average volume day. I still like objectives in the 1160 area but the truth is that’s a long way off and the index can’t get to 1160 without first clearing 1130, an area that has been rejected once back in June and again in early August when it was tested 6 times in an 8 day stretch but held. I think it gets cleared though and all those failures will probably attract enough buy stops to get a good start on 1160.

So now when I look at my 10-year chart, I see a market that is in the midst of the largest decline since the near 14 point rally began last April. Trend-lines and channels have been broken as well as wave-equality targets but remaining are several areas of good support based on Fibonacci retracement targets. They aren’t perfectly clear since if this is a correction, it is still debatable as to what part of the rally is actually being corrected. If the cash 10’s don’t hold 2.80/82, then a level exists at 2.855 that could have an impact. Beyond there I see 2.92 and then through 3% but wave theory does suggest that a trade through 2.89 will be followed by a test of at least 3.03 in what would be a correction of the entire move out of April. At some point, I’d like to see an impulsive structure develop otherwise I’ll be hard pressed to believe that a real top has been made but right now, things don’t look very good and there’s no rule that says the wave structure has to be clear. For the last time - at least for this week - I’m going to post the chart of the cash 10’s with the channel lines drawn on it and while I’ve removed all of the indicators except for the Price Proxy, I have included Fibonacci retracement lines for what would be a correction of the entire rally. While there is a minor one at 2.795, the first good target comes in at 3.028 although as mentioned above, a trade through 2.891 is needed to eliminate any wave-based possibility of another thrust to a new low yield first. And beside the 10-year chart is a chart of the 30-year with the trend-line drawn on it from the yield crest in April, 140 basis points from the extreme seen 2 weeks ago. A break of that line brings 4% into the crosshairs but the implications may be worse than that. A 4% 30-year would likely be accompanied by the 10’s trading through that 2.89 area and therefore targeting 3.03 so what it all seems to be telling me is that if the 30’s trade through their trend-line, which is just 2 basis points away from yesterday’s close, then the treasuries could be in for a run of more than 25 bps. Maybe things don’t work our quite as cleanly as I would like but still, this seems to be a real inflection point.

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I seriously doubt the market trades off much more from current levels before Monday but what happens then can prove to be monumentally important going forward for both stocks and bonds. Continued selling in bonds and buying in stocks with expanding volume would be an indication of significant extensions of the recent moves. Reversals accompanied by increasing volume could change everything. Like yesterday, based on my support and resistance, I’m having difficulty coming up with risk control levels that are as close to the market as I would like. As you can see, the first support area I have is at 123-10/14+ but with another right behind there at 123-05 so a stop at 123-04 is about the only thing I can come up with that seems to make sense. If you’re as risk adverse as I am in this market, you might just want to stand clear on a trade below yesterday’s close at 123-20 but between those two areas, I have nothing. On the upside, if you’re willing to risk longs down to 123-04 then about the only sell area that would make sense is at 124-08+ but here again, a less risky approach could be to trail the market with about a 9-tick stop if the 10’s can exceed 124-00+. In my opinion, a great position for today would be flat. As far as the a position for the weekend goes, if the 10’s can’t improve upon last week’s close at 124-00+, any longs would be very risky.  

9/09/10 – 8:15 – It appears as though the 2-sided volatility that has dominated the treasury markets for the past 2 weeks has not yet relinquished its’ hold. Tuesday’s rally, which eliminated nearly all of Friday’s losses, was reversed yesterday though not entirely erased and the markets are weaker again this morning. Since 8/24, the day before the top, there have been 6 down days and 5 up days with prices biased to the downside. I also see that a 50-day average range for the 10-year is at about 22+ ticks while the average since the highs 11 days ago stands at 29 ticks and that includes an 11 tick range on Monday when for the most part, the markets were closed. The SPX rallied to recover 81% of the losses taken on Tuesday before fading late but it is trading a little higher this morning. Volume in each market was a little better than it had been on Tuesday leaving things about like they were after Friday. Volume still seems to support lower prices in treasuries and higher prices in stocks although the wave pattern from the high in treasuries 2 weeks ago still looks corrective.   

I posted a chart yesterday of the cash 10-year with a channel drawn on it as well as my Cycle Stochastic indicator. I’m posting the same chart again with 2 more indicators added to it; the Price Proxy and a Cycle Moving Average. Aside from the channel lines, these are all custom indicators not found on other platforms and collectively, while not entirely in sync, they are telling me to pay close attention to the markets right in here for an indication that the well established up-trend is either still intact or has come to an end - at least for the near term. The channel is pretty self explanatory and the Cycle Stochastic is still showing a potential bearish divergence (remember this is a yield chart) but it has yet to be confirmed by a move back down through the swing low from 8/31. The Price Proxy is the red and green line and it has changed from red to green indicating a potential change in trend to higher rates but as this chart shows, that has happened on 3 other occasions since early June so while I really like the indictor, in and of itself it isn’t that convincing. Finally there is the Cycle Moving Average shown here as a bright/dark red line coming down above the recent price action. The way it is designed to be used is that when it is bright red, the trend is well established to the downside but when it turns dark red, a correction is underway. When the color changes back from dark red back to bright red, it is considered to be a signal to re-enter the trend or at least one component of an entry signal. When the trend turns from down to up, the line will then become bright green. As you can see here, the Price Proxy is indicating higher rates while the Cycle Moving Average is suggesting only a correction to the downtrend is under way. So while the downward channel is still intact, it is being threatened while the indicators are in conflict but a break above the channel will also be a break above the Cycle M.A. and that is likely to turn it green. A sharp move down in rates would confirm the divergence in the Cycle Stochastic, return the Cycle M.A. to bright red indication a resumption of the existing trend and turn the Price Proxy back down. I may rely predominantly on wave theory but if everything on this chart agrees, I would go with the break regardless of direction. The truth is that the 3 indicators all lining up are enough while a clean break of the channel would stand on its’ own as well. I’ve also included a chart of the 30-year set up the same way but with one difference. Rather than using a channel that dates back to May, the overhead line shown in blue is a trend-line drawn off the April yield crest which will be broken with a trade back through the yield crest made on Friday. And finally, while I don’t like to look at the ‘canned’ technical indicators any more than necessary, I do see that Bollinger Bands (not shown here), which are basically standard deviation bands, are ‘pinching’ together which usually signals an impending ‘breakout’ into a trending market but it offers no clue as to direction. Everything seems to add up to this being a critical juncture in treasuries with a substantial move likely to be just around the corner.  

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It’s been quite a while since I’ve even mentioned any of the markets other than treasuries and equities and while I’m not going to get into any analysis now, it seems at least noteworthy that the CRB Index has been rallying nicely of late, having recovered about 75% of the ground it had lost from the August highs which basically matched the highest levels that index had seen since back in January. That should be good news to anyone concerned with deflation – which we all should be. Gold, meanwhile, is flirting with its’ all-time highs having traded to 1264 yesterday and that could prove meaningful as back in June when it printed that record high at 1269.50, it broke back more than $100 to just under 1160. The Dollar Index is trading sideways following a rally but pretty much near the middle of the range that it has traded in for the past several years and with no clear indication of what may lie ahead – at least not to me. I’ll try to pay these markets more attention beginning next week.  

9/08/10 – 8:15 – A strong rally yesterday left Friday’s lows in the real view mirror and gives the pattern from the highs  a corrective look to it that isn’t going away without a hard break to the downside. I’ll stick with the idea that those lows must hold if the rally is likely to extend to new highs any time soon although following yesterday’s move, they seem far away. The price action was great with the opening proving to be near the lows of the day while the close was just about at the highs. In the case of the 30-year there’s even an opening gap to go along with the more than one point rally. While the personality of the market may have changed since the highs with the large price swings in both directions and in fact, already the largest pull-back since the April bottom, the volume continues to be the one disturbing factor. Yesterday it wasn’t all that bad but it was still lower than it has been on any down day since 8/09. I had expected the volume to re-enter the markets this week but with the Jewish New Years on Thursday, that was probably an incorrect notion. Lower volume doesn’t mean that the markets cannot continue to advance, but rather it just makes trusting the rally all that more difficult.

The stocks did gave back much of Friday’s gains and while the volume there wasn’t great, it was still better than for the treasuries relative to what has been happening there of late. I find myself not wanting to trust the rally in stocks although I can’t say just why. I keep mentioning that the apparent ‘head and shoulders’ bottom is not very well supported by the volume pattern but that doesn’t mean that the rally cannot continue and I think the objectives near 1160 that I mentioned yesterday are still a very real possibility. Support runs all the way down to 1065 so for now, I will remain an un-trusting bull. That doesn’t help me to be bullish bonds but if stocks do rally, it only takes away one reason to buy bonds and that may not be enough to break a trend as powerful as this one has been.

The markets are very quiet this morning and the economic calendar is bare. In fact, the calendar remains pretty clean throughout the week with only the weekly claims numbers tomorrow and Inventories on Friday to possibly shake things up. I guess that means we will not likely see any real pickup in volume before next week but as yesterday proved, we don’t need a pickup in volume for the rally to extend. Still, I suspect the better likelihood is that we see price action abate as well. Last night’s high was at 125-03+ while the 62% retracement of the entire decline is at 125-04. The 50% number is 124-27 and until there is a clear break towards either new highs or new lows, the middle of the range is not a bad place for the market to settle in. Above 125-04 and new highs will seem likely while below 124-03+ the better bet will be new lows. That 1-point range is key. For today I would use 124-12+ as a sell stop and 125-06 as a buy stop. I still don’t have a clear bias and if I felt compelled to trade I would simply trade against the support and resistance numbers shown at the bottom of this report.   

The daily chart of the cash 10’s shown below reveals them to be in a pretty reliable channel since May. If they were to re-visit the bottom of the channel, it means that they would trade to about 2.31 today which of course is very unlikely but that is a reference point that drops about 1 basis point per day. Conversely, a trade back through the topside of the channel would strongly suggest that the rally is over for a while and that reference point is just below 2.58, obviously also dropping about a basis point per day. I’ve also put my cycle stochastic on the chart and it shows a nice little divergence at the yield crest made on Friday which seems to suggest another sharp rally is about to unfold.

9/07/10 – 8:15 – In my abbreviated report on Friday just before the jobs numbers were released I stated “the levels that will be of most concern to me should they be broken are 123-20+ in futures and to a lesser degree, 2.713 in cash”. Well, the low of the day in futures printed within minutes of the release was 123-20+ leaving that market holding on by the slimmest of margins. The cash 10’s traded all the way to 2.768, well through its’ equivalent, but they did stop just 1 basis point from a trend-line drawn from the 5/13 yield crest and managed to close back at 2.706, at least keeping that much of the trend intact. While the futures did hold what I felt was a ‘must hold’ price, they also posted their 3^rd consecutive lower weekly close so it is clearly incumbent upon them to recover quickly if they aren’t going to create objectives much lower. As it is, if they don’t hold onto Friday’s lows, then 123-05/10 becomes even more critical as below there and they will likely wipe out the entire rally that began in August meaning targets no higher than 121-11. As I mentioned, the cash 10’s traded to 2.768 on Friday while they had a 50% correction target at 2.772 and now they have a trend-line at 2.757 so they, too, must hold onto Friday’s lows if they are not going to project lower and possibly quite a bit lower.  The 30’s also pretty much need to stay above the lows made on Friday since the high yield in cash at 3.875 was just .005 for the 62% retracement of all that has happened since their yield crest on 7/28 and they now have a trend-line drawn from the yield crest in April at 3.893. This morning they have attracted a nice bid likely in response to a lower stock market and are doing what they must do if the uptrend is to continue. As far as wave structure goes, the decline off the top made on 8/25 is clearly a 3-wave move while the secondary drop from the lower high on 8/31 looks more like a 5. That leaves the wave analysis unclear to me but perhaps more friendly than unfriendly.

Stocks meanwhile, gapped up following the news on Friday and after a test of the gap later in the morning, recovered to close near the highs and at levels not seen since 8/11. It looks to me like the 1130 highs from early August will be seen again and likely exceeded although as I just mentioned, they are under some pressure this morning.  

While Friday seemed to send a message for both stocks and bonds, volume should begin to increase this week over what we have seen for most of the summer and it will be interesting to see if the moves that began in late August will prove to be the beginning of something much bigger for both markets.  While I had expected a rally in stocks from the 1040 area, I felt it might prove to be a false rally prior to a much larger decline. I’m not yet ready to give up on that notion but now, objectives in the 1160 area look realistic. Bonds have had a remarkable run through the summer months but for the most part, it was never well supported by the volume and now they seem to be headed lower following a well timed reversal on daily and weekly charts. I always felt that the stocks might have a larger influence on the bond market than the jobs data would and I still feel that way. If the SPX is headed to 1160, then bonds are likely in for more downside but don’t lose sight of the fact that the SPX has already rallied 65 points in just the last 4 trading days so it is overdue for a correction and if it does start back up, 1160 can come up pretty fast. If the SPX reverses from there, assuming that it gets that far, it could well prove to be the highest level we see prior to achieving the 955ish objectives that I have felt would be forthcoming so I’m not at all ready to declare the bond market rally dead although I do think it has grown tired.

Until the 10-year can trade to 124-28, there is little in the way of resistance to hold it back and only above 125-13 will it appear to be headed back to the highs. The stocks in general have the gaps left on Friday morning as their first supports of any real significance so the early action today, while encouraging for bonds and not so much for stocks, is really not enough to get excited about. I’d be at least a little concerned if the 10’s couldn’t stay positive on the day and therefore would use 123-30+ as my stop while looking to sell against the band of resistance from 124-28 to 31+. While this week traditionally marks the return of a full deck of players to the markets, Rosh HaShanah, the Jewish equivalent to New Years, begins on Thursday and could serve to keep volume subdued for a few more days.  

 
9/03/10 – 8:15 – A relief of sorts as yesterday was rather quiet but with a downside bias. The cash markets made new lows below those of Wednesday while the futures didn’t but all closed lower in front of the jobs data due out at 8:30. Volume wasn’t great but considering the small range, it wasn’t that bad either. When you examine the volume on a day by day basis, it does seem that the buyers have backed away much more so than the sellers. The rally days have not been accompanied by good volume but the ranges have stayed large which indicates that the buy orders are dwindling but they are being met with fewer sellers allowing prices to advance without much ‘resistance’. The big down days have been well subscribed meaning that the buyers haven’t shown up there either allowing for the large range days down. While the action since the highs last week looks corrective, beyond that aspect of the wave analysis there are numerous warning signs that the treasuries could be putting in a top of some degree.

The stocks, meanwhile, rallied right into the close and through the 50% retracement level in the SPX leaving 1095/1100 as the only likely barrier to new highs above the 1129 print from early August. The high in the Dow at 10,320 was just 8 points below the 50% level there so like bonds, the next move of significance may be determined early today. Break points below are not nearly so clear.

9/02/10 – 8:15 – Another big range day yesterday, this time a break to the downside. I had mentioned that there have been 3, point-plus range days in the 10-year since last Tuesday in yesterday’s report and now you can add a 4^th. And once again, the volume on the break was far greater than it had been on the 2 previous rally days. The 30-year has now produced 2 days with ranges of near 2 points, 1 day with a range of nearly 2 ½ points and 2 more with ranges of nearly 3 points over the same stretch. It’s hard to imagine a more volatile market environment for the treasuries. The SPX meanwhile, caught fire and has traded more than 40 points off of the 1040 low of just 1 day earlier. The jobs report will surely be of interest but now it seems doubtful that it will produce fireworks beyond what we’ve witnessed over the past week. I’m still thinking that the stock market - more so than the jobs report - holds the key to the bond market. I felt that the 1040 area was key to the SPX but always felt that it would eventually give way. Now that it has been tested 3 times in just the past 6 days, each time producing a nice rally, if it were to give way at any time the selling would likely be more intense than had it just given up on the first or second try. The higher this rally in stocks can go the more sell stops will be placed below 1040. I’ve still not heard much about the now visible ‘head and shoulders’ bottom that has been formed but you can bet that technicians are looking at it and doing their measurements as to where it projects. I still see good resistance up to 1100 and then at 1130 but the ‘H&S’ projections are well beyond there. As I pointed out previously though, a true ‘head and shoulders’ pattern is one that needs the proper volume accompanying it, something lacking in this pattern. One more thing to mention about stocks is that the TRIN system, which had covered a short and taken a long position on Friday, added to it on Monday and again on Tuesday which at least tells me that there is some internal strength based on advancing vs. declining issues and volume.

But while I am convinced the fate of the bond market may lie with the stock market, this report is still about bonds so let’s look a little closer at them. The wave work has been unclear at best as I’ve had trouble reading the waves from back in May and June which makes it nearly impossible to determine where we are now. When I see an impulse down followed by a correction up, things will be different but that hasn’t happened yet. Aside from the wave work, I do see many potentially bearish warning signals being flashed. The increase in volatility in both directions is usually a warning of an impending change of trend and we still do have key reversals at the highs on both daily and weekly charts. The highs also remain on a week that fit into a Fibonacci pattern suggesting a turn, one that dates back to 2008. Any good technician knows that volume analysis is essential to any market read and there I see some troubling signs as well although they do come with some caveats. On the chart below, you can see that the increase in volatility has come with an increase in volume and that the biggest volume days of late have all been down days. That is typically a clear warning that a rally is about to end. The caveat, however, can also be seen on the chart below. Back in May and June, there was a similar pattern that accompanied what proved to be an intermediate high, but not a top. Another interesting feature seen on this chart is that beginning on the 28^th of May and lasting until the 23^rd of August, the volume suddenly dropped by about 50% before picking back up dramatically in the past week or so. That is a beautiful picture of why traders talk about the summer doldrums. One thing for sure, the lack of volume during the summer months had no negative effect on price action.  

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So there seems to be a litany of reasons to approach the treasury markets with a great deal of caution at these levels. My favorite oscillator of late, the cycle stochastic, has become rather unruly as well but that is to be expected when prices become this erratic.  The daily (bottom left) couldn’t be less definitive having leveled off with a current reading of 54 while the weekly (bottom right) is heading down and approaching oversold but still suggesting lower prices to come.

9/01/10 – 8:15 – On 4 of the last 6 trading days, the daily range for the 10-year has exceeded a point. Prior to now, you have to go all the way back to the 4^th of June to find a daily range that exceeded a point. In fact, I think there have only been 3 others all year and well into last year. I can’t say for sure why this is happening but it does indicate a greater than normal disparity of opinions amongst traders as to what may lie ahead. Most books written about technical analysis will tell you that increased 2-sided volatility is frequently an indication of a pending top or bottom and while I wouldn’t doubt that is what this is telling us, I still need to be convinced before I’ll stick my neck back on the chopping block. And if the volatility in the bonds isn’t enough for you, on 3 of the past 5 trading days, the SPX has printed a low between 1039.70 and 1040.88 only to reverse back to the upside. The first rally went for 21+ points, the second for 25+ points and now from yesterday’s low we’ve rallied more than 20 points. There seems to be just as much uncertainty with regards to stocks and it is all coming as we approach the holiday that typically marks the end of the ‘summer doldrums’ even if summer actually has another several weeks to go.

If you look at a long term chart of the stock market you will see that the Dow is only about 350 points from the middle of the range from the all-time high to the lows made last year, a 7700 point range. The SPX is about 75 points from the middle of the 900 point range there and yet yesterday, the 5-year treasury posted the lowest ever monthly yield close – the 10’s posted their second lowest. That does bring back into question just where these treasuries might really go if the stock market continues to trade lower, a risk that is apparently very real. At least for now, that 1040 support is doing its’ job but one can only wonder for how long?

 Yesterday the treasuries left opening gaps, the 5^th time that has happened just this month. One might suspect that the increase on volatility in both directions might scare people off but nothing would seem further from the truth as it feels more like a feeding frenzy for treasuries of all maturities. One peculiar thing I noticed about the most recent surge in the bonds is the fact that this time the volume just hasn’t been there. On Friday, the combined volume for the September and December contracts (the only real way to watch volume during contract rolls) was a little over 3mm. Monday and Tuesday combined it was just over 3.5mm. That would seem to suggest that despite the price action, fewer buyers are entering the markets but they are being met with fewer sellers as well. The reduced volume might fit with the notion of this being a B-wave rally meaning we need another pull-back towards the area of Friday’s lows but it doesn’t fit well not with it being an impulse wave so it seems unlikely that we will see new highs prior to another pullback or some help from the jobs data – unless of course the stocks take a nose dive. Stock traders may be worried about the jobs data which could explain why they’ve been range-bound for the past week but the bond traders have to worry not only about jobs but also about stocks, adding to the uncertainty. I seem to always find myself warning about a possible reaction to Friday’s scheduled release on Thursday. Whether it be from leaked data or just investors trying to front run the numbers, it does happen all too often but absent another such occurrence, it seems like we will head into Friday’s data with 1040 as a low in stocks and with last week’s well-timed reversal still in place in bonds. June through August, typically a quiet time in the markets, provided us with a basically sideways stock market but with a very strong treasury market; the 10’s having gained about 8 points during that time frame.