^_Tbondtrader

1/31/11 – 8:15 – I think it is fair to work under the assumption that the lows made last week were B-wave lows to be followed by what may very well prove to be the best and last rally we will see before the downtrend that was interrupted in mid-December resumes. It’s not that we haven’t had several other ‘false starts’ and couldn’t have another but with the timing being what it is and the duration of the correction already almost too long for my preferred count, I think we should approach this week as though a rally is unfolding and make the market prove that it isn’t. I’m still not ready to label the entire correction the minor degree 4^th wave that I thought it would be from the beginning, or a larger degree 2^nd wave but regardless, I do think the 10’s can now trade up into the lower 122’s and that target can improve over time. There always has been good resistance in the upper 121’s and it still needs to be respected but for now, that should be a low-ball target. The cash 10’s should have some problems around 3.25 and again near 3.18 but I really like the 3.14 area as an objective and I also think that the 30’s have a solid objective near 4.33 and with a parallel shift in the yield curve, those last 2 objectives are pretty consistent. For now everything seems to be pointing up for this week – everything but the markets early this morning which are under some minor pressure.

Volume was very good on Friday, well above the 50-day average, marking the second consecutive high volume rally day. There were suggestions mid-day that the rally was part of a flight to quality as a result of turmoil in Egypt but why the treasuries rallied isn’t really as important as the fact that they did. All of the daily oscillators are pointed up and moving up and none are at overbought levels although I suspect it won’t take more than another day or so for the Cycle Stochastic to reach into overbought territory. The weekly Cycle Stochastic has already reached overbought and that intrigues me even if I don’t much care for oscillators. That is the one oscillator that seems to fit well with the notion that a significant C-wave rally is under way and that a top is not far off. And one last thing worth mentioning is that the daily Price Proxy turned to a buy as of Friday’s close. The weekly Price Proxy remains in a sell mode.

 
Other markets:  The SPX did exactly what I feared it might. After poking its head above the last resistance I saw in this general area for the second consecutive day – it never managed a close there - and from the highest price it has seen since September of 2008, it took a swan dive and closed down more than 23 points wiping out 6 days worth of gains. Here again the blame was laid at the feet of the turmoil in Egypt but this is one market that has defied gravity for a long time. Nearly every indicator is suggesting that stocks are headed lower although in all honesty, I have no good wave count that would explain a significant failure from here. I might add that I don’t trust the counts that suggest we are in a bull market move with objectives at new all time highs so I am squarely in the camp of not knowing just what to think. I will be looking for at least a short-term preferred count and post it when I find it.

With the news out of Egypt impacting the other financial markets as well, none reacted more violently than Crude Oil which closed up more than $3 which was more than 3%. Gold rallied as well but never even got above Thursday’s high so that wasn’t so impressive but the CRB had a great day closing up 1.22% at 335.44 which was still a little below the highs made the previous week and still short of even the low end of my 337/340 objectives. As I had pointed out on 1/20, the day after the high of the move, it has achieved 99% of the low end of that target range and thus remains vulnerable. The Dollar benefited from the flight to quality and while I keep thinking that market is headed higher, it needs to do better than just close up so I’m waiting a little longer to make an assessment there.  

Chart for the Day:  I’m posting a chart of the 10-year today with a volume histogram and the channel that I have been showing for the past several weeks now. Unlike the charts I’ve posted prior, I’ve left off all of the other targeting tools I use just so that you can see a clear picture of how well this channel looks and at the same time, see for yourself how the volume patterns has played out. The cyan bars on the histogram represent days with higher close while the red bars are the days with lower closes. The yellow line is the 50-day average volume.

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Summary:  If the treasuries have begun their C-wave rally, then only a trade below 120-15+ in the 10-year would seem to interrupt the pattern while a trade below 120-23+ might be used as an early warning that something was wrong. That said, there is no similar level that I can use for the 30’s so it is still a little soon to label the push up with any real confidence. The picture of the channel posted above along with the near perfectly constructed ‘flat correction’ on the 30-year yield chart along with the timing I explained last week is what makes me believe this is it and for that reason, I would approach the market with a positive bias today but once again I feel compelled to issue the warning that I think in the bigger picture, this is a rally that needs to be sold and the bigger picture doesn’t seem to extend much beyond this week. Given that bearish backdrop to my short-term positive bias and the spacing between my nearest support numbers, I’d use 120-23 as my stop on long positions and simply because I’m not looking for the rally to happen all at once, I would be selling into my next resistance at 121-15+ or at the very worst, trailing a 9-tick stop behind the market once it has traded at 15+. Using that latter strategy, I wouldn’t hesitate to sell into a trade at 121-23+.   

01/28/11 – 8:15 – I was out of the office all day yesterday and will be out most of today and to complicate matters, my data feeds were down until early this morning so this report will be brief. The treasury markets all opened under pressure yesterday but reversed to close with solid gains. The 10-year held exactly where it needed to by posting a low tick at 119-28+. I had felt and stated that the only long trade that made sense was to buy against 119-28+ with an 18+ stop and following the 119-28+ low, the 10’s rallied all the way to 120-22. I know that a strong winter storm hit the northeast and I expected to see that the volume was way off but in fact it was well above average. While the 10’s were reversing from their trend/channel line, the cash 30-year held at a lower yield crest than it did on Wednesday leaving the door wide open there for a ‘B-wave’ low interpretation and that has been the weakest treasury chart that I watch. Now factor in the timing I had for yesterday/today and I would at least think that a move back up through the recent range is a distinct possibility but there is just one problem; the markets have come under pressure again overnight and need to find some support early. Obviously, yesterday’s lows take on added importance on all of my treasury charts. Before the markets opened yesterday I had felt they were at a point of reckoning of sorts and about to either reverse from a B-wave low that could produce a 2-point plus rally in the 10’s - or collapse into an impulsive decline to new lows below those established on 12/16. I feel the same way this morning.

 
Other markets:  The SPX poked its head through that 1299 resistance barrier that had held it back and at this point, trust it or not, I just cannot see being short equities. Show me a reversal of any size with a 5-wave decline and I might be a seller of a corrective rally but for now, my next objectives are quite a bit higher.  I ‘m not going to address the other markets I follow until Monday due to time constraints.

 
Charts for the Day:  No charts for today.

 
Summary:  “Today is one of those days that may very well produce a low based on time, price and pattern if you look at the several charts that I do but it is also a day that seems to be demanding a high degree of caution with regards to trying to buy bonds”. That was cut and pasted from yesterday’s strategy but I might as well have just written it. About the only difference is that with the trend-line in the 10’s advancing each day, I would still want to see yesterday’s lows hold there. That said and with the 30’s still very close to their 12/16 yield crest, this is a very treacherous time for treasuries based on my work. The idea that a B-wave low may have been made based on the factors I mentioned above is already tenuous at best since the rally out of yesterday’s lows does not look impulsive and the markets are under more pressure than they should be if it were the case. A sell stop is a little tricky but I’m not so sure the correct one is not just below first minor support at 120-12+. That is very close to current levels but the next support is at 03+ which is just too close to solid support down to 119-28+ to make it a sensible sell stop. Discretion being the better part of valor, I think maybe 120-11+ makes the most sense on a risk/reward basis. As far as the upside goes, if a secondary rally does develop, I think I would chase the 10’s with a 9-tick stop and sell into 121-01.

1/27/11 – 8:15 – A lower opening followed by a downward drift characterized the day yesterday up until the FOMC news was released. In the 15 minutes that followed, the 10’s made new highs for the day and then new lows for the day. My longer-term negative bias and that fact that the day closed on a weak note following what had been the most important news event for the week so far has me leaning towards the downside as far as holding any positions go but it is still difficult to make a case that the decline from the highs made on the 14^th is impulsive, at least with regards to the 10’s. Absent any evidence of an impulse wave down, the correction may well have yet to complete but my thoughts stem from my desire not to miss seeing the forest for the trees. Since 12/20, just 3 days out of the lows, the range in the cash 10-year has been 3.25 to 3.50 – the actual extremes being 3.249 and 3.497 - and since 1/05 the range has been narrowing which is indicative of a market that is capable of making a loud statement at any point in time. The 30-year has a much more menacing look to it, especially the cash bond, since yesterday it matched the second worst close it has made since the correction began on 12/16 which also makes it the second worst close since 4/28/2010. The other thing about the 30-year chart is that there, I can make an impulse wave count that began on 12/31 whereby waves-1 and 2 are completed and at least a minor degree 3^rd wave could be unfolding. It would be nice if all of the charts had the same short-term look to them but they don’t. They do, however, have the same longer-term look to them and that is the look of a market that is correcting prior to another impulse down in price. I just can’t emphasize that enough. For now, perhaps for the next several days or even a week or more, the thrashing back and forth could continue but it still seems to be case of ‘pay me now or pay me later’.

Volume was lower yesterday than it had been on Tuesday and given that Tuesday was a strong rally day and yesterday a down day, that is at least one positive to draw from. The fact that yesterday was an inside day left little in the way of price features to address and the fact that it was a down day pushed the oscillators lower but not to any significant degree. The Price Proxy tried to turn from a sell to a buy by flashing green early in the day but the only thing that matters there is the close and by the close, it was still in a sell mode.

Looking collectively at the 10’s and 30’s, I would be very defensive in here although I always prefer to read the 10-year, especially for short-term calls, and it has yet to tell me that it is impulsing down. A hard break through 4.64 in the 30-year would be the first indication that an impulse might be upon us. The 10’s have trend-line support at 119-28 which may not be as meaningful but it would still represent a negative if it were to give way. And not to be forgotten is the timing I had mentioned for today or tomorrow. While it may prove to be meaningless, it could offer up one more positive since now it looks very unlikely that it would produce a reversal from a new high but a reversal from a new low that could prove to be a B-wave low is still a distinct possibility. There remains plenty of uncertainty but it is uncertainty in a heavy market.

Other markets:  The SPX rallied to a new high prior to the Fed news and slightly exceeded it afterwards before backing away slightly. I only mention the ‘backing away’ part because the high was at 1299, exactly at my final resistance area before I would throw in the towel on any short position - and keep in mind that my target was 1290/91 but due to resistance at 1299, I felt that was the correct area to use for a stop. My point is that I would already be leaning in the direction of expecting 1299 to be exceeded but until it is, it isn’t. The volume was disappointing, coming in below the 50-day average and only 2/3rds that on Tuesday. That is surprise in that the index posted its’ highest high since September of 2008 but at the same time, the first part of the day may have been poorly subscribed to due to the Fed news so we wait another day and see.

We got a bit of a bounce in Crude, Gold and the CRB and new lows in the Dollar but I’m going to put off further analysis on those markets due in part to some trading platform issues and because I just don’t have enough new features to do much with anyway. Tomorrow closes out another week so I’ll try to do some work on my weekly charts and post the results tomorrow or Monday.

Charts for the Day:   While the 10-year chops around in an ever narrowing range, I thought I would post a daily chart of 30-year yields since that is the one market that can fall of the ledge as early as today and without need for very much help. Remember that at, or even slightly through the previous yield crest is where a B-wave can be expected to bottom but at this point I just don’t know if that is what we are doing. This chart, at the very least, should have anyone who is long the longer end of the curve very concerned. For the record, while it is the yield crest posted on 12/16 and slightly exceeded on 1/20 that I am currently focused on, the yield crest that is visible at the extreme upper left hand side of the chart is the highest yield posted by the 30-year since October of 2007 and it is barely 25 bps away and very much within range of the next impulse wave whenever it does develop.

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Summary:  Today is one of those days that may very well produce a low based on time, price and pattern if you look at the several charts that I do but it is also a day that seems to be demanding a high degree of caution with regards to trying to buy bonds. Using wave analysis, it is always the hope to enter trades near the inception points of impulse waves but at least the 30’s are at what could prove to be a confirmation point. Still, focusing on the 10-year, the only long side trade I could see trying would be to buy against the trend-line at 119-28 and place a stop at 119-18+. I would not hold onto a long position below 119-28+ without that stop in place. The only buy-stop that I could recommend would be just above 120-15+ which doesn’t represent much in the way of resistance but being at such a critical juncture I would keep my risk on either side to a minimum.

 
1/26/11 – 8:15 – Yesterday wasn’t such a dull day as a larger rally unfolded and it was accompanied by a good increase in volume and suddenly new highs above any made during the past month no longer seemed unlikely. The 10’s eventually closed nearly ¾‘s of a point higher but they’ve given back about 12 ticks overnight. This afternoon’s FOMC news can still be a game changer from my perspective, especially since I think the bigger picture remains bearish. There were stories circulating yesterday afternoon that were attributing much of the treasury bid to rumors about the content of the State of the Union Speech given by President Obama last night. It’s funny how when there is no news, somebody will always find something to trade off of. Whether or not those rumors were responsible for the burst yesterday is hard to say; it may have been one of those cases of ‘buy the rumor and sell the fact’. Just over a month ago when the correction began, I had felt like the 121 handle was the most likely place for the correction to be headed and for it to end and it still feels that way if we can just get through this hurdle. One of the more interesting targets I’ve been watching for the 10’s is up against the upper channel line that I have shown often and most recently yesterday. Today that line has reached 122, as it increases about 1½ ticks per day. I have no problem with trades in the 122 handle but I have often mentioned the notion that the larger the correction became, the more likely it was going to prove to be a correction of a larger degree than what I had initially thought. It isn’t so much a matter of price as a matter of time and the timing already suggests that we might be in a larger degree wave-2 rather than the small degree 4^th wave that I originally thought. If that is true, then the 3^rd wave, whenever it begins, will be a beast with yield targets well north of 4.25 so this is something I want to stay on top of. I still think it can go either way and I still say that the minor degree 4^th wave correction is the only one that fits for the 30-year. In that scenario the next impulse to higher yields would be more likely to hold closer to 3.80 before a more sustained corrective rally would develop. Either way, for now everything still seems to point me towards higher yields in the near future but so far I see no signs that the impulse down has begun.

Having already mentioned that yesterday was a good volume day I should also mention the fact that my Cycle Stochastic actually reached oversold readings on Friday and turned back up on Monday. The more traditional Stochs as well as the RSI have turned back up as well but from mid-range never having offered even a suggestion that a bounce might be pending. And while those more traditional indictors don’t suggest the same thing, the Cycle Stochastic on a weekly chart has actually reached overbought so we might want to keep an eye on that as well.

From a timing perspective there is an interesting count pointing to a potential trend-change on either Thursday or Friday. I wouldn’t view it as critical but timing can be a great tool when used in conjunction with others so if we were to get a reversal from a recognized resistance area on either of those days, I would pay a little more attention to it than I might have otherwise. The reason for the timing is that Thursday or Friday is where the entire rally since 12/16 - if you want to call it that - will have lasted the same number of days as did the decline from the 11/04 top into 12/16. The reason for the 2-day window is that the count is based on weekdays and there was a holiday during the decline. I believe those counts need to be watched both using weekdays and trading days so either day works for me.

Other markets:  The SPX overcame early weakness to close fractionally higher for the day. The futures actually posted an outside with a near ‘doji’ as the open and close were at about the same level but in futures, the close was fractionally lower for the day. Volume was strong, the highest seen since 12/07, but with the closes about unchanged it is difficult to read much into it. Stocks, perhaps even more than bonds, seem poised to react to the Fed news today and they are set to open slightly higher.

Gold traded lower but rebounded to close about unchanged and from very near good support. I doubt the decline is over but I want to begin to look for potential long entry points. Crude Oil has just gotten crushed of late, having lost nearly $7 a barrel in just 4 days and with several gaps left above. I’m not so sure there is a good recovery awaiting there but I’ll post some targets in the coming days. With weak Gold and weak Crude, it’s no real surprise that the CRB gapped down and closed on its’ lows. That chart makes me think the others will not rally anytime soon since it can be read as having rallied in a 5-wave move to a great target and one that can be terminal. Each time I look at and think about the CRB, the word ‘deflation’ comes to mind. And finally, the Dollar Index weakened once again but at least it stayed within the range it established on Tuesday. All of these markets can be sensitive to the Fed so I will address them again after today.         

 
Charts for the Day:   While I still want to get past today’s news before making any new bold assessment as to where things are headed short-term, I thought I would go ahead and post charts of the 30-year similar to those of the 10-year that I posted yesterday. Targets for the futures seem best near the previous highs where the rally equal to 38% of the decline from late November with the next ‘double hit’ area several points higher where that market would retrace 62% of that recent decline as well as 38% of the break from early October. The yield chart would suggest that there is either another 13 bps to get to the closest target if the correction is ongoing with several other great targets including gaps but ones that are quite a bit further away. This may be the best chart to watch for evidence that the move has a good deal of room left in it on the upside in prices. I will address these targets again, perhaps as soon as tomorrow.

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 Summary:  I had a feeling that this week was all about the Fed and now it seems that really is going to be the case. Yesterday’s rally made the case for a B-wave low being in place much stronger but the overnight weakness is threatening that notion. A trade below 120-15 would put an end to a C-wave rally count but it wouldn’t necessarily eliminate the chance for further improvement. Still, the news this afternoon can overpower short-term patterns and for short-term trading, I think it would be well advised to avoid exposure to that news. I think I would use 120-11+ as my stop on any longs and if I felt compelled to take a shot at the long side on a break, I would try to buy against 119-27/00+ with another stop at 18+. Should the market recover I would stop out a short position on a trade at 120-28+ and not look to sell again this side of 121-15+. I think the best advice is to use stops at 120-11+ and 120-28+ and avoid the market altogether from 2:00 on.

1/25/11 – 8:15 – A really dull but positive day left the patterns only marginally better than it found them and I’m going to abbreviate this report accordingly. I had felt that a trade through 120-13 would suggest that the 10’s are not impulsing down and with a high tick at 120-15, I guess I’ll stick with that plan and say that I suspect we are in an ongoing correction that can still see new highs above any made since the correction began on 12/16 – at least in the case of the 10-year futures. I’m not 100% sold on that notion and I remain firmly of the opinion that rates are headed higher but I do think it is becoming more likely that there will still be more time and more upside before the next downward impulse wave unfolds.  One thing to note is that the volume yesterday was only about ¾‘s of what it had been during Friday’s rally and only about ½ of what it was during the hard break last Thursday. Another low volume up day today would make the rally very untrustworthy and with the FOMC rate decision due out Wednesday afternoon, just about anything could still happen. At this point, however, I just don’t see a 5-wave decline and until I do, I won’t be able to make much of a case for new lows but to be sure, I think that new lows are coming and I don’t think they are very far off.

Other markets:  The SPX rallied nicely and it seems to be threatening to take out my 1299 ‘stop area’. If it does, I still don’t have any other decent nearby targets so my ‘strategy’ if you want to call it one would be to be a seller with a stop at 1301. Above there and I suspect there will be a significant extension to the rally. I have not yet looked for a spot to be a buyer but I will soon enough.

All of the other markets that I report on closed lower yesterday. The breaks in Gold and the CRB came as no real surprise while the break in Crude was perhaps the ugliest of the lot but I hold no clear opinion one way or the other for that market. The Dollar Index took it on the chin once again and in fact it printed a low of 77.81 before ‘bouncing’ to 78.05 on the close; the 62% correction of recent rally was at 77.85. I do see good support down to 77.69 but if the index cannot hold yesterday’s lows, I can no longer say that I think it will turn up but rather I would wait to see if it can.

 
Charts for the Day:   Since the report is a short one, I thought I would go ahead and post charts of the 10-year futures as well as yields showing the best targets I have for any further rally attempts. If there are no dramatic new developments today, I’ll do the same for the 30-year tomorrow. In the case of the futures, I have included Fibonacci retracement targets for the decline from the top on 11/04 (yellow) as well as from the secondary high on 11/23 (red). Additionally I have included a wave equality target as well as an overhead channel line. As for the yield chart, here I am including 3 sets of retracement targets; one from the yield trough on 10/08 (yellow), one from 11/04 (red) and one from 11/23 (cyan). Here, too, I have included what I think is the correct wave-equality target. These are not the only targets but what I find most interesting on these 2 charts are the areas that represent multiple targets; most notably the 121-25 area in futures and the 3.14 area in cash. And finally, and I know I keep saying this but only because I think it is that important, I think the markets are headed down. I do think we can see a bounce back up through the range but when the Fed news is released - or given any other surprises - I think these markets can turn down in a hurry. The short-term rally potential seems to me to be nothing more than a potential opportunity to place shorts for the next real move down.

Summary:  With the low volume day yesterday, I’m expecting to see another today. There is some 10:00 news to deal with but with no earth-shattering surprises I would expect to see some mild upside but nothing to spectacular prior to the Fed news tomorrow afternoon. If we have actually seen a B-wave low then we can expect to see the 10’s moving on up into the 121 handle but I doubt it happens all at once and for now I would be a happy seller against my 120-23/27+ resistance. For me, that is a fairly large band and using a 5-tick trailing stop following a 120-23 trade is not a bad idea either. Absent a trade at 120-23, I would use 119-28+ as my sell-stop.

1/24/11 – 8:15 – An early bounce Friday morning followed by a secondary test of Thursday’s lows and then a secondary rally back to the early highs sets the stage for a likely resolution of the short-term patterns today. Much of an extension to the rally – especially with a pick-up in volume - would suggest a potential B-wave low is in place and should be followed by a return to the upper end of the range that has contained the treasuries for the past month. A break below the 119-20 area would likely be followed by a test of the lows from 12/16 at 118-17 and if they don’t hold, a solid impulse down would be underway with targets quite a bit lower still. For the record, on Friday the 10-year posted a lower weekly close for the first time since 12/24.

The action on Friday may very well have been a minor degree correction since by the end of the day, all of the treasury markets had basically double bottomed against the lows from Thursday and then double topped against the highs from early Friday morning. That can be a simple ABC flat correction before the next push down but if the rally can extend through those highs and especially if the 10’s can exceed 120-13, then  the probabilities that an impulsive decline began on 1/14 would diminish dramatically. Volume on Friday was down considerably from Thursday which lends credence to the notion that it was a simple corrective bounce but then again it was a Friday and I’ve learned to expect lower volume for that reason alone. One way or the other the short-term pattern should become obvious very soon. Of course there always seems to be a caveat and today’s caveat is that the economic calendar is very light for the first half of the week but with the FOMC rate statement due out Wednesday afternoon. Does that mean that the markets are likely to be well subscribed to for the next 2½ days without the threat of news or will traders stand back and wait to see the latest from the Fed? Wished I knew but I suspect that price will tell us buy the end of today.

One obvious feature to Friday’s trade was that the low in the 10-year was basically right on the lower trend-line that also defines the channel they have been in since the December lows; the low having been 119-22 while the trend-line was at 119-22+. Having now held on 2 consecutive days, I think the trend-line and those lows take on added importance going forward. Now think back to the highs made just 1 week earlier when the 30-year traded up to 122-02 while a major down-trend line had a value of 122-03. Trend-lines are typically expensive to trade but over the previous 6 trading days they could have made for a very nice trading week for sure. I know I mentioned in an update prior to Friday’s that the value of the trend-line increased 1½ ticks per day so for today the line has reached 119-24.

 
Other markets:  The SPX had a nice recovery rally on Friday, retracing just over 80% of the ground lost since the highs made on Tuesday but the highs were in place by mid-morning and the rest of the day wasn’t so pretty. The close was about 3 points higher for the day but that was 8 points off of the intra-day highs and only about a point off the lows - not very pretty for an up bar. The volume was fairly strong but still lower than it had been on the 2 previous down days and a good deal of the volume can be attributed to selling since the highs were in place so early. One last note and that is that Index had a lower weekly close from a new high of the move. It’s a key reversal to the downside but the close was far enough off of the lows to make it look not so menacing. It marks the first lower weekly close since 11/26 of last year however. I remain very wary of equities in here.

Gold continued to trade lower as did Crude but the CRB actually gapped up and left a 1-day island reversal below. Obviously there are other commodities that make up the CRB Index that contributed to the move so we’ll just have to see what it all means. I know this is probably beginning to sound old but while I don’t have a strong feel for where Gold or Crude are headed, until the CRB Index can clear the 341/342 area, I’m in the mode of thinking that it won’t. The Dollar, meanwhile, traded sharply lower again and has but one area of support left near 77.85 before I will officially give up on looking for a rally, at least until I figure out a different wave count that makes sense. The close on Friday was at 78.14.

 
 Chart for the Day:   While I wait for the very short-term patterns in the treasury markets to unfold, I thought I would post a weekly chart of the CRB Index as I think it may be about to tell us something pretty important. I have posted nearly the identical chart in the past but for those of you who may have missed it or just don’t remember it, this is a weekly chart of the Index and shows the retracement targets on it based on the bear market from July of 2008 through February of 2009. Additionally I have drawn wave extension targets on it based on the initial rally into January of 2010 and the pullback into May and now I can include a trend-line over the recent highs. As you can see, the 50% bear market retracement, the wave-equality target and the overhead trend-line all fall between 337 and 341 what looks to me like about 25 points of unobstructed territory to cover if that area can give way. The next round of conversations about inflation vs. deflation may very well be impacted by what happens from just above current levels.

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Summary:  I see nothing but mild resistance until the 10’s reach into the upper 120’s but a trade above 120-09 makes the impulsive count to the downside suspicious at the very least and with an area of minor  resistance just above there at 120-13+/15, I wouldn’t give a short position any more room than 120-16 for a buy-stop. As far as a sell-stop goes, there is minor support at 119-30 but that might be a little close with such good support from 119-19+ to 119-24 so I think I would go with a 119-18+ sell stop and see what happens.

1/21/11 – 8:15 – A lot of damage was done yesterday but the fact is that not a single potential wave count that could have been considered after Wednesday has been eliminated – that of course assumes that all of your counts were bearish as were mine. The potential triangle on the chart that I posted yesterday is the pattern that came the closest to being eliminated but while the high yield of the day penetrated the trend-line that defines that upper end of the triangle, to destroy the pattern would take a trade through the yield crest from 1/05 at 3.497 so it remains at least a low probability. The other market that is stressing the limits of what would be the only preferred count that would allow for another rally is the cash 30-year which traded to 4.638 yesterday while the correction began from a yield crest at 4.624 on 12/16. The B-wave of a flat correction should hold at the inception point of the correction but there are exceptions and some margin of error must be considered. That is the only treasury market that has failed to hold the extremes established on 12/16 so an ongoing correction is still a possibility. That said, there has never been a doubt in my mind that new lows were coming sooner or later – at least not based on wave theory – and I don’t think it would be very prudent to assume that aren’t coming now. If a rally is to commence from near current levels, I would hope to find an entry point based on a very short-term pattern otherwise I would consider it a rally that I don’t mind missing rather than risk getting caught in a break that has seemed inevitable for the past month.

Volume in the 10-year picked up once again and that, too, is a good reason not to ‘assume’ the markets won’t break down further. Once this correction has ended, I would suspect the futures will be headed into at least the 117 handle and if it turns out that the correction has been a 2^nd wave and not the 4^th wave I was looking for, the 117 handle will only be the beginning. Sometime last week I posted a chart of the 10-year futures with a channel drawn on it that had contained the trading since the 12/16 bottom and yesterday the low at 119-22 was just 1-tick above the lower boundary of the channel which is another way of saying that it held at a trend-line. The line had a value of 119-21 yesterday and 119-22+ today so if yesterday’s lows give way, then so too will one more of the near-term potentially friendly patterns.  As previously mentioned, yesterday’s break carried the cash 10’s through the trend-line that defined the triangle and absent a quick recovery, they have just one more obvious support area before they are likely to at least test the high yield posted on 12/16 at 3.566. The 30-year futures held about half a point above the lows they made on 12/16. If this recent break has been a B-wave, the markets need to get traction very quickly and from a slightly different wave perspective, if the correction is over then the impulse would have begun last week and we would be falling off into a 3^rd wave of at least that impulse meaning the markets absolutely will not get traction in here. It should become pretty obvious which is the case very soon. All of the oscillators are now clearly pointed down and coming off of negative divergences which could influence others to take a more pessimistic view of things. My Cycle Stochastic is already approaching oversold but that alone means little and the others are nowhere near oversold. And finally, my Price Proxy which had been struggling to remain in a buy mode lately, went to a sell yesterday. All roads seem to be headed to the south.  

 
Other markets:  If there is to be a saving grace for treasuries it might come in the form of a weakening stock market but the fact is that from the high on Monday to the low yesterday, the S&P dropped about 25 points and during the same time frame, the 10-year lost over a point. I am not of the opinion that the bigger picture in the treasuries is likely going to be affected by stocks but certainly over the short term it can be. My thoughts have been and remain that if the SPX can clear 1299, it can keep right on going but so far it has held below that level and is showing some significant signs of fatigue. The first fairly obvious support for the SPX isn’t until about 1261. The TRIN system which I mention from time to time gave a sell signal right up against the highs – on Tuesday’s close to be specific - and while it has not been setting the world on fire of late, that is still a signal generated by weakening internals and in my opinion it should not be taken lightly.

Gold had an ugly day losing nearly $25 and I suspect it has further to go and while that was happening, Crude was getting crushed. It gapped down and closed more than $2 lower. The CRB gapped down as well and closed lower but at least it closed near the best levels of the day. Based on the bigger picture of the CRB, I wouldn’t trust any of the commodity markets. The Dollar rallied but not very convincingly and I won’t be commenting on that one just yet. I liked that chart longer term but must admit that it has already gotten a lot softer than I would have anticipated.

 
Chart for the Day:  I thought I would show a daily chart of the 10-year futures with the above mentioned channel drawn on it along with the Fibonacci retracement targets for the entire decline from the November top as well as my wave-equality target for the last rally; the latter being the target that so far has worked the best. I’ve also include a volume histogram which is color coded to make it easier to see the up verses down volume; the up days are shown on the histogram in cyan while the down days are shown in red.   
 

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Summary:  I seem to remember saying last week that Friday’s typically are low volume days and low volume days frequently are counter-trend days so a bit of a recovery today wouldn’t be very surprising, very telling or very meaningful. For purposes of risk management I would be using a 120-16+ stop on any shorts. That isn’t above a very meaningful resistance area but if cleared, the next one runs up to 120-27+ and that’s way too much risk for me given recent developments. My sell stop is a no-brainer. A trade below 119-19+ breaks the trend/channel line that held yesterday and opens the door for at least another quarter point and perhaps a lot more.

 
1/20/11 – 8:15 – Although the 10-year traded up through 120-26+ yesterday, the level that I felt would eliminate the potential for a 5-wave decline from Friday’s high to Tuesday’s low, upon closer examination I’m not so sure that it actually mattered. I had viewed the lows made on Tuesday as likely 3^rd wave lows based on the notion that Monday represented a 2^nd wave but it works just as well to view Monday as having never happened since the trade was almost non-existent due to the MLK holiday and in fact it doesn’t show up at all on the yield charts since cash was closed. Without using Monday’s action, there is still a distinct possibility that the lows made on Tuesday represented the bottom of a 5-wave impulse and all that has happened since then, a correction. So far the rally/bounce doesn’t look impulsive and as far as targets go, the recovery high in the 10-year futures is just a plus above the 50% correction of the break. There remain too many ways for things to work out from here to make a guess so I think giving the markets another day or so is the correct approach. If the rally extends beyond 121-01, then I think that the bigger upside correction that began on 12/16 has yet to complete and that means the next targets are above 121-20. More on levels later but the point is that if a high has been made, the markets need to turn down in a hurry. Remember that the 30-year yield chart shown yesterday reflected a near perfect B-wave yield crest since it was within a basis point of the one made on 12/16. From a bigger perspective, one that goes back to the lows on 12/16, the 10-year futures are in a upward channel while the cash may very well be triangulating and at the same time, the 30-year has been trading sideways since the lows; in all of those cases the patterns show absolutely no signs of an impulse wave up meaning that the lows are almost certainly going to be taken out soon enough.  

I won’t bother updating you on all of the indicators; one because I don’t care much about them and two because yesterday was a quite inside bar on the charts and none of them moved much. Volume did fall off from what it had been during the previous 2 down days and that just means nothing much has changed with regards to the entire sideways to higher trading we’ve witnessed now for nearly a month; the breaks are better subscribed to than are the rallies. At the end of the day, the treasury markets are closer to the best levels they’ve seen over the course of the past month than the worst but they really aren’t going anywhere and waiting out these corrective looking patterns is clearly the best thing I know to do.  
 

Other markets:  The SPX finally made a big move and it was to the downside. It broke below the lows of the previous 3 days and basis the futures it did it on the best volume it has seen since 12/07. And while it had traded above my long-held to target of 1291, it never cleared the 1299 level I had suggested was the correct one to use for a stop on shorts. I’m not yet sure just what sort of top was made but I had felt that my 1291 target could have been a terminal one and even with the overshoot, that may still prove to be true. At least one prominent market prognosticator mentioned just a few days back that he felt that stocks were within a week of a top that would produce a drop of at least 11% and right now I wouldn’t argue with him. I think it is important to be very cautious of stocks in here, at least until they break much deeper or else take out 1300, and they can still have an impact on treasuries – especially if they break hard.

As far as the other markets I most watch go, Crude had a negative day but for now, the decline from the top made last week looks very corrective. The next day or so could change things but for now it still looks ‘ok’. Gold closed $2 higher but that was very near the lows and $9 off the highs so I wouldn’t view that as friendly price action nor do I care for the chart formation there. I’m not convinced that Gold and Crude will go 2 different directions but for now that is how I see them. The CRB made a new high before reversing to close lower. I continue to think that Index is much more likely to trade much lower than even a little higher with 341 being the number that if breached, would change my mind. The Dollar broke hard and even after a mild recovery, it still closed below the lows made on Tuesday. I’ve thought that the Dollar was headed higher but now I’m not so convinced.
 

Chart for the Day:  Without anything compelling to show today I thought I might include a chart of 10-year yields with a potential developing triangle that I have been watching, drawn on it. This pattern shows up on this chart only and given the near perfect double yield crest that the cash 30-year made on Tuesday against the 12/16 crest, the notion of a ‘flat’ correction there is just as good as is a triangle here but I frequently remind people that wave analysis is all about the process of eliminating possibilities and if this triangle doesn’t materialize then having at least considered it will make the elimination process that much easier. One thing that gets my attention about it is that based on wave theory, triangles are found in only 2 places; 4^th waves and B-waves. My preferred longer-term count when this correction began back on 12/16 was that we were about to see a 4^th wave although the longer it has gone on, the less likely it seemed that it was the correct call. It still works though and a 4^th wave remains the only way I see to count the 30-year.

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Remember also that the ‘e-wave’ of a triangle can overshoot or undershoot the lower trend-line, it just can’t go beyond the ‘c-wave’ low so if this is the correct pattern, it can complete pretty quickly - just food for thought.

Summary:  I continue to believe that patience will pay off and that the pattern will likely reveal what is about to happen soon enough. It isn’t so much the final look of the correction that began on 12/16 that I’m concerned with so much as it is ‘what the correction really is’. I’ve gone over it enough times but there is a great deal of difference in what happens after a 4^th wave verses what happens after a 2^nd wave and which this proves to be is what I am trying to determine. For today I would go with 120-10+ as a sell stop for any long positions and 121-02 as my buy-stop on short positions. I remain longer-term bearish but uncertain about the very short-term.

1/19/11 – 8:15 – The secondary break needed to at least put the bulls on the defensive materialized yesterday and now I think it is incumbent upon the market to recover to avoid an impulsive look to the decline. The wave structure is a little tricky right here since my intra-day charts show trades on Monday but they were very poorly subscribed to due to the holiday and I don’t know if they can be trusted as part of the pattern. If they can, then they probably represent a 2^nd wave while the last half of the day yesterday would be a 4^th. One more new low below 120-06 prior to a trade above 120-26+ would give the 10-year a clearly impulsive look. One catch though; a 5-wave decline could be a C-wave completing a minor ABC from the high on 12/20 which would make it the end of a bigger B-wave. That would leave the markets needing one more 5-wave rally and in all probability, if that happened the entire correction that began on the 16^th of last month would be a large wave-2 with a really ugly 3^rd wave coming once it completed. The alternative is that the entire ABC correction has been completed and we have already begun the next impulse wave to the downside. I know that’s a lot of A’s and B’s and C’s but I think I can explain it better shortly with the help of some charts. A good target for the next low if the decline that began on Friday is to be a C-wave is at 119-20+ which is convenient if it were to occur today or tomorrow since there is a trend-line at 119-19+ today and 119-21 tomorrow. The same pattern on the yield chart would target 3.499, an interesting area in any scenario. Perhaps the most interesting chart to watch with regards to that potential pattern is that of the cash 30-year. If the markets are in B-waves, then the primary target would be the low from which the correction began meaning the lows of 12/16. The above mentioned target for the 10-year is based on wave equality but the pattern in the 30-year is different and there, at yesterday’s worst levels, the yield on the long bond touched 4.611 while the previous yield crest from which the correction began was at 4.624 so that, too, is a great target – perhaps better than the above mentioned one for the 10-year - and one that for all intents and purposes has been achieved. Things are never as clear as you would like them to be but the point I am taking from all of this is that we are very close to determining if the correction has ended and we are heading to new lows across the board, or whether it is an ongoing and larger degree correction which is approaching the low end of its trading range. I should be able to sort through this in the next day or so based on wave structure. As I have tried to explain on several previous occasions, the friendliest outcome for the near-term is the least friendly for what follows.

Volume analysis offers no help to the bulls as yesterday’s break was accompanied by better than average volume but not nearly enough to label it a blow-off of any sort and that tells me we are still likely to see lower lows. Stochastics turned down leaving bearish divergences which can only go to enhance the bearish look to the charts although that always leaves open the possibility of bear trap – the very reason I wouldn’t trade off of those patterns. There was no change in my Price Proxy; it remains in a buy mode although the 10’s are nearly back to where they were when the ‘buy signal’ was generated. Disciplined trading using wave theory would have us wait for this 5-wave decline to complete and then sell the rally if it appears to be a correction. That would also allow for better clues to develop with regards to volume with possibly some confirmation coming from the Price Proxy.

Other markets:  The SPX continued to push higher, posting a high at 1296.06 with a close just a point below there. There are no bearish clues coming from any oscillators while volume remained good, though not great. I need more time to determine if the rally will stall or extend but I’ll stick with the notion put forth last week that a trade through 1299 would leave me with targets significantly above where we are and no reason to be short.

 The Dollar Index made new lows but remained above what I consider to be critical support. In fact, the low for the day was at 78.64 while a wave equality target I referred to last week was at 78.66. There is also a good target at 78.54 before the upside will begin to look dicey to me. Gold had an up day but that chart looks to me like this rally should be sold near last week’s highs. Crude had a large range day with an outside bar but a very neutral close. As for the CRB Index, is shows no signs of being done but remains below my 337/340 potentially terminal objectives.

Chart for the Day:  I’m posting 4 charts today; 10-year futures and yields as well as 30-year futures and yields. On each of them I am showing what I think are the best targets to look to if we are still in a B-wave. If that is the case, then very likely from one of these target areas we will see a move back up through the range before the real selling commences. As mentioned above, the alternative is that the correction has ended. The first scenario is labeled using upper case lettering while for the second I have used lower case.

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If this current decline does prove to be a 5-wave move and the rally out of the low is corrective, these targets should all give way during the next break but for now they represent the best place from which a decent rally can come if one is to occur. As you can see, the patterns on the charts are all somewhat different and that makes for different relative targets with regards to the wave equality and/or Fibonacci extension targets but in each case, the extremes seen on 12/16 shown here with a red horizontal line, represent perfect targets for the termination point of a B-wave. I will still remain most focused on the structure of any rally that commences from any 5-wave decline but these targets can all offer great opportunities to enter the long side with a very tight stop – or confirmation that we have begun another leg down by virtue of them not holding.

Summary:  While the markets seem to be breaking down and in many respects from about when and where they always seemed like they might, as discussed above they are reaching a very critical juncture. From a wave perspective, the structure of the rally out of the first 5-wave decline can offer the most important clues we are going to see. The best shorting opportunity beyond having sold the highs is always to sell a corrective move out of a 5-wave decline. I think we need to see the markets trade to a new low to complete a 5-wave move. If the 10’s exceed 120-26+ before they make new lows, then in all likelihood the rally is not over and given how close the 30-year came to the yield crest from 12/16, we may very well have seen a B-wave low with a 5-wave, C-wave rally back through the recent range likely to follow.  For today I would be using 120-27 as my buy-stop based on pattern rather than resistance while using 120-10 for my sell stop. The support down to 120-00+ is much stronger and might make more sense as a stop but my overall negative outlook would prevent me from risking that much on the downside.

1/18/11 – 8:15 – The futures actually traded yesterday but let’s pretend like they didn’t since there was virtually no volume associated with the trade. Much like on Thursday, after some early selling the 10’s turned back up on Friday and made new highs of the move at 121-15+ by 10:00 a.m. but this time things didn’t end quite so well. Sellers emerged and drove the 10-year to a lower close producing a key-reversal on the daily charts. Keep in mind that the potential ‘wedge’ formation that I addressed in Friday’s update had an upside target of 121-12+ and wave theory suggests that the target for the last leg of a wedge tends to be overshot or undershot. The cash 10’s may not have made it to 3.24 as I had hoped but they did manage to trade at 3.255 which was within a band of resistance that included the previous low yield of the entire corrective looking move which began back on 12/16. Additionally, the 30-year futures posted a high at 122-02 while the trend-line that I had mentioned in Friday’s update had a value of 122-03 - a near a direct hit - and the close was nearly 1¼ points off of those highs. And while the 10-year futures did manage to close higher for the week, the cash 10’s and 30’s did not. All things considered, especially given my longer-term negative bias, I’m leaning towards the bearish side but until we get some sort of secondary break, at least the 10-year remains in a reasonably strong up-trend so perhaps a neutral posture makes more sense.

The most important evidence to me will always come in the form of price and/or pattern with volume a close second but whether I like them or not, I’ll keep an eye on the other indicators and report what I see. For starters, volume on Friday was below average which is somewhat surprising given that there were new highs of the move printed before the reversal so the price action should have gotten the attention of traders on both sides. On the other hand, Fridays typically don’t produce good volume so I think this will be a developing story as the week unfolds. Neither the RSI nor the MACD show anything resembling an overbought market and only the RSI actually turned to the downside but the Stochastic, both the standard one and my preferred Cycle Stochastic, continue to trade below the levels they had achieved early last week setting up bearish divergences should the market continue to soften. My Price Proxy remains in a buy mode but due to the intra-day flashes of red on Thursday, I doubt that it would take much more on the downside to change that. I also have a custom moving average that I will put on my charts from time to time and this is one of those times. This particular average is coded to reflect when it thinks a market is trending and when it thinks it is correcting. It is of course subject to the user defining the time frame and that is crucial to what it says. I use several inputs, all Fibonacci numbers, and when I apply the averages that I use, the shortest one remains in a buy mode but the other 2 reflect a reading suggesting the entire rally has been a correction and while they are pointed down, they do not yet say that the correction is over. Just about everything tells me we may have seen some sort of high but that we may also need a few more days to get any sort of confirmation that a top has - or has not - been made.

 
Other markets:  The next market of interest to me is the SPX which traded through my 1291 target even if only by 2 points. It got to the highs on the close, however, so it showed no signs of failing as of Friday. As I mentioned in the update Friday morning, I could tolerate trades up to 1299 before I would begin to look for higher targets. The volume on Friday was better than one might expect for a Friday so with the close on the high and above resistance and on good volume, I would not be too quick to sell into the rally.

Next up is the Dollar Index and all the fireworks there occurred before I sent out Friday’s report. I mentioned in the report that the Index had traded at 78.81 and rallied about 50 ticks and that was just about as good as it got. It eventually gave back about 30 of those ticks and closed lower for the day and much lower for the week. I like that market longer-term and I like the support down to 78.50 but I don’t much like the recent price action and need to see a reversal quickly if I am going to stay friendly. Gold broke hard, closing down about $11 and it appears to me to be headed lower still. Crude sold off early but recovered nicely so collectively, those 2 markets tell me little. The CRB, the proxy for all commodities, remained strong but still below what I consider to be critical resistance from 337 to 340; the close having been 333. I keep saying I’ll address these markets in more depth very soon but I need them to tell me something before I can tell you.  

 
Chart for the Day:  It seems like most of my updates include some mention of indicators like MACD, RSI and Stochastic as well as reminders that I don’t really care much for them. That said, I thought I’d go ahead and include a daily chart of the 10-year today with all of them applied. The top one is the Cycle Stochastic which I think is perhaps the best of the bunch and it is followed by the standard Stochastic, the MACD and the RSI. Additionally, I have included 3 moving averages; a 13, 21 and 34 bar (you may notice that those are all Fibonacci numbers). The simplest application of a moving average is to view a market as in a ‘buy’ mode when it is above an average and in a ‘sell’ mode when it is below it so in this case they are still ‘friendly’ but what I find interesting about them is how close together they have become; the values of the 3 being 120-09, 120-16+ and 120-17+. Notice the last time all three were this close together. This chart includes trades from yesterday as well as last night which show up as today’s trades.

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Summary:  While I had isolated an unusual amount of solid resistance/targets in the 10-year futures in the 121 handle, they seem to be eating away at it little by little. This morning the treasury markets all have a mild bid to them and if they can manage a trade above 121-08+, they may very well push on up to new highs once again. I would still place the 10’s in one of 2 likely wave patterns; one being a 4^th wave correction which has already lasted longer than it should have but which could still see trades in the upper 121’s while the other is a 2^nd wave which could persist quite a bit longer and could easily see a push towards 3.09. The next day or so should resolve which of those 2 placements is the more likely. If there was ever a spot to be cautious even at the risk of giving up some of the rally, this might be it. For today I would have my sell-stop no lower than 120-16 with 120-26 not such a bad one either.  And once again I would gladly sell into a push into my next resistance area at 121-21/23+ since that strategy has worked pretty well for the past several days. When in doubt, I frequently trail the 10-year with a 9-tick stop and I don’t think that would be a bad ploy for today either.

1/17/11 – 8:15 – After some early selling on Friday, the 10’s turned back up and made new highs of the move at 121-15+ around 10:00 but this time things didn’t end quite so well. Sellers emerged and drove the 10-year lower on the day producing a key-reversal on the daily charts. Keep in mind that the potential ‘wedge’ I addressed in Friday’s update had an upside target of 121-12+ and that wave theory suggests that targets for the last leg of a wedge tend to be overshot or undershot. The cash 10’s may not have made it to 3.24 as I had hoped but they did manage to trade at 3.255 which was in a band of resistance that included the previous low yield of the entire corrective looking move which began on 12/16. Additionally, while the cash 10-year exceeded the trend-line I had mentioned on Friday that was a single basis point beyond Thursday’s close, the 30-year futures posted a high at 122-02 while the trend-line there had a value of 122-03 so I’ll call that one a direct hit. The 10-year futures did manage to close higher for the week which was a good sign but the cash 10’s and 30’s did not. All things considered, especially given my longer-term negative bias, I think I’d be leaning on the bearish side unless and until I see a reason not to.

The most important evidence to me will come in the form of price and/or pattern but volume will be key as will other indicators whether I like them or not. For starters, volume on Friday was below average which is somewhat surprising in that there were new highs of the move printed before the reversal so the price action should have gotten the attention of traders on both sides. On the other hand, Fridays typically don’t produce good volume so I think this will be a developing story as the week unfolds. Neither the RSI nor the MACD, two popular indicators, show anything resembling an overbought market and only the RSI actually turned to the downside but the Stochastics, both the standard one and my preferred Cycle Stochastic, continue to trade below the levels they had achieved early last week setting up bearish divergences should the markets continue to soften. My Price Proxy remains in a buy mode but due to the intra-day flashes of red on Thursday, I doubt that it would take much more on the downside to change that. I also have a custom moving average that I will put on my charts from time to time and this is one of those times. This particular average is coded to reflect when it thinks a market is trending and when it thinks it is correcting. It is of course subject to the user defining the time frame and that is crucial to what it says. I use several inputs, all Fibonacci numbers, and when I apply the averages that I use, the shortest one remains in a buy mode but the other 2 reflect a reading suggesting the entire rally has been a correction but while they are pointed down, they do not yet say that the correction is over. Just about everything tells me we may need a few more days to get any sort of confirmation that a top has - or has not - been made but as I stated before, my longer-term wave counts would keep me in the bearish camp for now.

Other markets:  The next market of interest to me is the SPX which traded through my 1291 target even if only by 2 points. It got to the highs on the close, however, so it showed no signs of failing as of Friday. As I mentioned in the update Friday morning, I could tolerate trades up to 1299 before I would begin to look for higher targets. The volume on Friday was better than one might expect for a Friday so with the close on the high and above resistance and on good volume, I would not be too quick to sell into the rally.

Next up is the Dollar Index and all the fireworks there occurred before I sent out Friday’s report. I mentioned in the report that the Index had traded at 78.81 and rallied about 50 ticks and that was just about as good as it got. It eventually gave back about 30 of those ticks and closed lower for the day and much lower for the week. I like the market longer-term and I like the support down to 78.50 but I don’t much like the recent price action and need to see a reversal quickly if I am going to stay friendly. Gold broke hard, closing down about $11 and it appears to me to be headed lower still. Crude sold off early but recovered nicely so collectively, those 2 markets tell me little. The CRB, the proxy for all commodities, remained strong but still below what I consider to be critical resistance from 337 to 340; the close having been 333. I keep saying I’ll address these markets in more depth very soon but I need them to tell me something before I can tell you.  

Charts for the Day:  It seems like most of my updates include mention of indicators like MACD, RSI and Stochastic as well as reminders that I don’t really care much for them. That said, I thought I’d go ahead and include a daily chart of the 10-year today with all of them included. The top one is the Cycle Stochastic which I think is perhaps the best of the bunch and it is followed by a standard Stochastic, the MACD and the RSI. Additionally, I have included 3 straight moving averages; a 13, 21 and 34 bar (you may notice that those are all Fibonacci numbers). The simplest application of a moving average is to view a market as in a ‘buy’ mode when it is above an average and in a ‘sell’ mode when it is below it so in this case they are ‘friendly’ but what I find interesting about them is how close together they have become; the values of the 3 being 120-09, 120-16+ and 120-17+. Notice the last time they were this close together.

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Summary:   If my longer-term negative bias is to prove well-founded, then whether or not the other charts perfectly satisfy the short-term patterns, the fact that the 10-year futures now have a high at 121-06+ compels me to approach things from a defensive posture. Last Friday the 10’s closed at 120-21+ so any close today better than that will be a higher weekly close and give no reason to think we can’t do better next week.  The problem with that thinking is that 3:00 is a long way off. I see some mild support at 120-22 and if you are risk-averse, then a stop just below there might be a good idea. I certainly wouldn’t let the 10’s trade past 120-11 if I were long. Should they recover from their early weakness, I wouldn’t hesitate to sell into my next resistance at 121-12+ with a tight stop. While I still see no signs of a top, I would much rather go home with a short position than a long one from these levels.

1/14/11 – 8:15 – Some nice follow-through to Wednesday’s reversal produced a new high in the 10-year futures at 121-06+, right in the middle of my next band of resistance which I had made at 121-05+/07+. The 05+ part of that band was the type of number that, once broken, means nothing but that area was always a good target and we’re left with 07+ as a still meaningful resistance. The markets are a little softer this morning but once again, with only the 10-year futures having made a new high I’m still not convinced that the rally is over. I’d like to see the cash 10’s make it back to at least 4.24 and the fact is that it will be an odd correction if the ultimate yield trough is not better than that. The 30’s have an altogether different look to them and I don’t know whether to expect a considerable extension of the rally from here or a failure before they improve upon their recent best levels. For short-term calls I’ve always preferred the 10-year for my wave counting, using the 30’s for confirmations, and I’ll gladly stick with that approach for now.  One potential count for the 10-year futures would have them in a wedge from the lows on 12/28 which is a common pattern for a C-wave – a C-wave being what I believe the 10’s are in. That doesn’t change much as the target for that wedge is at 121-12+, moving up 3 ticks per day, which is pretty much right in line with the many targets I’ve already identified in that area. And one more thing that may be worth paying attention to is that fact that 3 of the 4 charts that I monitor the closest, reflect markets that are closing in on significant trend-lines. I never trust trades taken against trend-lines – they tend to be undershot or overshot and often produce head fakes - but they’re hard to ignore and frequently tell something of importance when they are tested. Today the cash 10’s can touch an important T/L at 3.290, just 1 bp beyond yesterday’s close, while the 30’s have one at 4.407, still about 9 bps away. The 30-year futures have a T/L at 122-03 which is about 20 ticks away.

I bet you know where I’m going next. Volume yesterday was about 200,000 contracts greater than it was on Wednesday so as the market has advanced, so too has the volume. It hasn’t reached the extreme seen last Friday but yesterday was just the 3^rd time since the day before the December bottom that the volume exceeded the 50-day average. Friday’s are generally lower volume days so a read today could be tricky but if the rally persists and the volume tapers off, that will be a warning signal to be sure. Likewise, a lower close on declining volume would be difficult to trust as any sort of a failure. There is some bearish divergence that has developed on a stochastic oscillator but it will only be meaningful if the market reverses quickly. And once again I have to marvel at the Price Proxy. It was actually flashing red, which would be a sell signal, early in the day yesterday but went back to green by the close. That does seem to indicate that it won’t take too much downside to turn it back to a ‘sell’. It went to a buy on the 4^th when the 10’s closed at 120-10+.    

A few days back I made mention of the many important resistance numbers that I had isolated in the 121 handle. It’s very unusual that I would have so many of what I consider to be solid numbers in such a tight cluster. If you look closely you’ll see that after 121-07+, I have 121-13+ and then from 121-21 to 121-29+ it is almost non-stop. After that, however, I see very little for the next point. There will be numbers to watch in cash but the point that I’m hoping to make is that the one market that seems to be the single best one to watch for intra-day trades, is making it very difficult to zero in on a single area but it also seems to be saying that the next 20 ticks will not come easily.  Beyond 121-29+ and the notion that this rally has been a minor 4^th wave correction will seem pretty unlikely. The best alternate count continues to place the 10’s in a second wave and with targets beginning near 3.09 but that would also give me targets well beyond 4% once the correction ends.

 
Other markets:  The market that made the loudest statement yesterday was the Dollar Index. It lost 82 ticks, a little over 1%, and is now flirting with the lows made in early December. I had mentioned yesterday that targets near 78.70 had become likely and the low yesterday came in at 78.99.

This morning it has traded at 78.81 but bounced about 50 ticks so things could get interesting pretty quickly. A trade below 78.50 would be disappointing to someone like me who thinks the Dollar should be headed much higher. Stocks had a quiet day with the SPX trading in just a 6 point range. Even I can’t find much to say about that one but keep in mind that it is very close to some long held objectives and I think the next several points/days can prove crucial. Gold poked its head above the 50% correction of the recent decline before collapsing and finishing with an outside down day, off about $16. Crude sold off as did the CRB but neither to any alarming degree. This area is critical, at least to the CRB Index and now to the Dollar so by next week we could have a lot to talk about.

 
Charts for the Day:  No charts for today.

Summary:   If my longer-term negative bias is to prove well-founded, then whether or not the other charts perfectly satisfy the short-term patterns, the fact that the 10-year futures now have a high at 121-06+ compels me to approach things from a defensive posture. Last Friday the 10’s closed at 120-21+ so any close today better than that will be a higher weekly close and give no reason to think we can’t do better next week.  The problem with that thinking is that 3:00 is a long way off. I see some mild support at 120-22 and if you are risk-averse, then a stop just below there might be a good idea. I certainly wouldn’t let the 10’s trade past 120-11 if I were long. Should they recover from their early weakness, I wouldn’t hesitate to sell into my next resistance at 121-12+ with a tight stop. While I still see no signs of a top, I would much rather go home with a short position than a long one from these levels.

1/12/11 – 8:15 – The treasury markets have come under some pressure this morning and the pressure comes following a day worthy of concern. Yesterday produced an outside down day in the 10-year futures after they printed the highest high seen since prior to the 12/16 low. That is exactly how I would like to see the rally end. Unfortunately, the high was just above one of my resistance areas but shy of the next and at the same time, the 30-year futures as well as the cash 10’s and 30’s failed to get above Mondays highs which were still below the highs made on 12/20. I’d like to see everything make a new rally high before my next anticipated down leg begins so I have a bit of dilemma. As much as I am looking for a failure and got exactly that in the 10’s, I’m not convinced that was it – nor am I convinced it wasn’t. The fact is that the 10-year futures and the cash 5-year are the only markets that have even a potential impulsive count to the downside visible on 5-minute charts. Obviously I don’t want to get too cute with the short-term wave patterns since one problem that comes with doing these daily pattern updates is that I’m essentially using a microscope to examine something that might be better left to reading glasses. All of my longer-term work says to be a seller and yet I’m waiting for the very short-term charts to say ‘now’. The risk to relying on 5-minute bar charts is not seeing the forest for the trees and missing the big moves by trying to keep track of the small ones. That said, I think/hope we can still see better levels to sell into but things are getting dicey. A trade in the 10-year below 120 does enhance the look of a failure there. One more thing does come to mind though which is that if this outside down reversal gives way to another new corrective high and if the minor timing I had for today produces an upside reversal, a stronger case can begin to be made that the correction that the 10’s entered into on 12/16 is more likely a larger degree 2^nd wave than the minor degree 4^th wave count that I prefer. That is a friendlier count for the near term but a more negative one once the correction ends. That count never did and still doesn’t work for the 30-year but I do think we are reaching a point of reckoning and need to be flexible with regard to the wave counts.  

Beyond wave structure, volume is to me the most important thing to track and the volume during yesterdays break was 200,000 contracts greater than it was during Mondays rally. I’m not ready to call it a pattern of disturbing volume but the roadmap that I had laid out previously with regards to volume was that it should be poor over the course of the entire correction – which it has been - and that during the correction the volume should be greater on the up days than on the down days – which it has been - but that once the correction ends and the downtrend resumes, overall volume should pick up and the downside volume should exceed the upside volume – which could be happening; to be continued. The only indicator beyond volume that I really care about is the Price Proxy and it remains positive from a turn made on the 4^th but as good a directional indicator as I think that it is, it is still a lagging indicator and not a leading one. As far as the ones I don’t care about go, the standard stochastic actually pushed higher yesterday and is beginning to reach into overbought territory. The fact that it made new highs along with price leaves no bearish divergences there but that isn’t the case with my preferred cycle stochastic which made its high back on the 4^th and has not move back up to that level so there is divergence there. Not much else to talk about with regards to oscillators but I’ll take another look at them tomorrow.

 
Other markets:  The SPX closed higher yesterday but remained within the trading range that has contained it since the first of the year. This morning, however, it is trading in new high territory, likely to open with an upside gap. I have viewed the action since 1/03 as clearly corrective and likely to lead to new highs and that seems to be materializing and as I’ve repeated many times of late, my targets for now are 1290/91 which are now less than 10 points from the current trades.  

The Dollar rallied early yesterday but closed lower following its downside reversal on Monday. That makes the reversal a little more disturbing but I think we’ll need to get past the Beige Book at the very least before it tells us much. Gold had a decent day but Crude had a much better one and the CRB gapped up and closed very near its highs. If the CRB can overcome 340, it may have a long way to go which means commodity prices would be headed up as well but so far the resistance I had outlined months ago is holding and here, too, the Beige Book can have an impact so I try to deal with these markets tomorrow.

 
Charts for the Day:  Most of the charts that I post are labeled in one way or another to show support/resistance or wave counts. I thought today I would post 2 perfectly clean charts that pretty much speak for themselves. On the left is the daily chart of the 10-year futures and on the right is the daily chart of 5-year yields. These are the 2 that had clear downside reversals yesterday and until they are erased, they must be respected for the potential bearish implications that they reflect.
 

Summary:   This is the first morning in quite a while that the markets are set to gap lower and with real concern on my part. I can’t rule out that the overall sideways movement since 12/20 is all part of a B-wave that is ongoing and could carry the markets back to the lows before another push up commences but if that is the case, there will be plenty of time to get ready for that ‘bounce’. I think the prudent approach given my longer-term bearish outlook is to treat this break as potentially the beginning of a much bigger one and make the markets prove that it is not. I like to place stops beyond support and resistance so as I look at my numbers, the best place for today seems to be just under 119-28+ but once 120 is broken, the pattern in the 10-year becomes more disturbing. I see the 10’s currently trading at 120-07+ and if they open around there, a gap will exist up to 120-12+ making that an obvious sell area. If it can be overcome then the break off of yesterday’s highs will begin to lose its impulsive look with the next likely resistance at 120-21+/24+. I think this may be a day to error on the bearish side and sell into the gap since if my longer-term count is correct, once the next impulse begins it is not likely to let up for several points. I would also caution against being long when the Beige Book is released at 2:00, especially if the 10’s have not traded back above 12+.

1/11/11 – 8:15 – Yesterday’s trade wasn’t exactly ‘action-packed’ but more corrective in nature leaving me to believe there is still some upside - though not necessarily very much. The high tick in the 10-year of 120-31+ was right at one of my long-held targets, the exact 38% retracement of the move down from the 11/23 high, but if this rally is indeed a correction then once it has completed I expect to see a sharp break with the characteristics of a 5-wave move and so far I see none of that. I also think that the cash 10’s should take out their yield trough from 12/20 which was at 3.249 and I’d like to see the 30’s take out their 12/20 extremes as well so while I’m concerned every time I see a target get touched, I remain guardedly optimistic about the upside. Basis the 10-year, I still can’t rule out the possibility that this is a large degree second wave meaning it will last quite a bit longer and extend further than I originally thought - nor can I rule out a failure from yesterday’s high - but no matter how I view it, all roads seem to lead to new lows sooner or not-too-much later. While I have some minor Fibonacci based timing for tomorrow, I will still remain on high alert for a failure from any of my listed resistance areas. Remember that for today, the cash 10’s have a trend-line at 3.247 and a Fibonacci retracement target at 3.246 so that area is of special concern. Another thing to keep in mind is that while the economic calendar was quiet yesterday and is fairly quiet for today, tomorrow afternoon we get the Fed Beige Book and that could be a real market-mover.

In yesterday’s report I mentioned that I expected to see the volume taper off and that’s exactly what it did. Yesterday’s volume in the 10-year was about half that of Friday and well below the 50-day average and that is more in keeping with the notion that this rally is destined to fail. While the closes were higher, prices didn’t move enough to warrant wasting time going over the other indicators.

 
Other markets:  The SPX once again dipped down towards the gap left last Monday but held just a fraction above Friday’s lows which had been about 1 point into the gap so it continues to do its job of supporting the market. The more times it’s tested, the more it seems destined to get filled but from the standpoint of wave structure, when I look at the SPX chart I see a market that has traded sideways since last Monday’s upside gap. On 4 of the 6 trading days the low has been between 1261.70 and 1262.88 (the other 2 days had higher lows) while on 4 days the highs have been between 1276.17 and 1278.15 (the other 2 being lower highs) and that just about as sideways as you can get. To me, sideways following an up move usually translates to more upside so I still suspect we will see my next target area of 1290/91 tested. Volume was about average in the S&P futures which is better than it has been for most of the month with the exception of Friday and the bulk of the volume came during the first hour when the market broke hard and then began to recover. Beyond that it was rather quiet.

Gold, Crude and the CRB all traded modestly higher but with little feature while the Dollar posted a downside reversal, closing near its lows. I still look for the Dollar to do better but the trouble yesterday came from very near the highs of the recent range, those made on 11/30 at 81.44 – yesterdays high having been 81.31 - and until they are overcome, the prospects for another push down through that range remain intact. The Beige Book, set for release at 2:00 tomorrow, reflects economic growth and that can impact equities, the dollar and the other commodities which make up the CRB Index just as much as the treasuries so once we get past that news, I hope to have a better read on just what they are doing. Remember that the CRB has all but nailed a long-standing target area and one that I believe can be terminal so what happens from here can be of great importance to the financial markets in general.   

 
Charts for the Day:  No charts for today.

 
Summary:   I think the markets will still push higher but I am not at all convinced that the rally won’t run out of steam this week and when I include the 30-year in my analysis that seems like the best scenario. From a larger perspective, I would no longer play the long side once the 10’s trade at 119-31 but that’s way too far away for a stop. I would start the day using 119-17+as a sell-stop and either sell into a trade at 121-05+ or at least use that as a trigger to move my stop up to 119-30. Above 121-07+, my sell stop would become a 9-tick trailer.  

1/10/11 – 8:15 – In my interim update on Friday posted at 9:30, I included the following line, “my call is that if you see a trade back at 3.420, things could get ugly”. The high yield at 9:50 was 3.415 and the markets never really looked back. The futures never even dipped back below 120. About the only wave count that got eliminated on Friday was the triangle on the 10-year futures chart and the fact that it was destroyed on all but the 10-year futures on Wednesday made it a low probability count anyway. The remaining counts from the lows on 12/16 are aplenty but on all of my charts, the movement out of the 12/16 lows looks to be corrective and that fits with my longer-term wave counts which seem to show either incomplete impulse waves to the downside or possible completed 1^st waves with secondary impulses to follow so I’ll continue to look for the right spot to sell into this rally as we move forward.  

 The friendliest developments on Friday were that the yield charts all finished with outside reversal days with closes beyond the yield troughs from Thursday while the 10-year futures cleared their downtrend line drawn off the November top. The cash 10-year will encounter trend-line resistance at 3.23 today and 3.247 tomorrow which is perfectly consistent with the 38% retracement of the move from the late November yield trough but I have a problem with that area as a target. Two days out of the December yield crest the 38% target was tested and since the yield crest following that test was a good 7 bps below the initial yield crest in December, I would expect to see a lower yield for what I believe to be a C-wave developing. The wave equality target is at 3.17/18 and that seems to me to be a better target as is the 3.14 area in my opinion, but to be sure the 3.24 area is good resistance and needs to be respected as such. Looking a little closer at my futures chart, I now come up with a new target area around 121-13/14 and that one also seems to be consistent with yields below 3.24. If the rally carries much beyond this week and/or 3.14, I would begin to suspect that we are not in a minor 4^th wave correction but rather in a larger degree 2^nd wave correction and I will address objectives and timing for that only if it seems necessary but while both time and price objectives for a 2^nd wave are better than they are for the lesser degree 4^th wave, the objectives for the move out of that correction are much further away. In either case I see higher yields in front of us.

 As to just where we are in the correction, I suspect that the A and B-waves are completed and we’ve now begun the C-wave rally. The simplest count would have the B-wave ending on Wednesday of last week and we may well have seen waves 1, 2 and possibly most or all of wave-3 of what should be a 5-wave move. I probably don’t have to tell you that in that scenario, the high will come very soon, probably between now and Wednesday. It is possible that the B-wave has not yet ended since only the 10-year futures have taken out their best levels seen on 12/20 and then only by a few ticks. As long as the trading range that began on the 20^th persists, we can still be looking at a B-wave meaning we can still go back and test the lows of the move but I think the fact that we broke the trend-line in the 10-year futures and had the big outside reversals suggests otherwise. It should become clear in the next day or so. The first sign of trouble will come with a trade back below 120-00.

 Oscillators on the weekly charts are showing minor signs of life from oversold territory and while I know that keep reminding you that that I hate relying on them, I still feel compelled to report their progress for the sake of anyone who feels differently and besides, it’s always good to know what others are thinking. The same indicators on the daily chart show me nothing much different than they did when I posted them on a chart last week. I will keep up with them and let you know if I see anything that can be construed as a signal of any kind. And as I reported last week, my Price Proxy turned up last Wednesday. I keep saying that it is my favorite directional indicator and Friday was just one more indication of why. And finally, how could I not mention volume? On Friday the 10-year traded the most contracts that it has traded since 12/08. If that pattern were to continue I would eventually have to reconsider my position but I suspect that much of it came from short covering and that we will see a general decline this week as things settle down on the upside. The volume for the day on Friday was about 1.4mm and 400,000 of it came during the first hour.

Other markets:  The SPX broke down hard the first half of the day but the low came in at 1261.70 which was just 1 point into the 3 point gap left last week and by the close the market had recovered more than half of the ground lost. I still expect higher prices there.

In just the last 3 days the Dollar Index recovered most of the ground lost since the November highs and seems to be back on track to trade higher – I think a lot higher. Gold, Crude and the CRB all softened but not dramatically and I’m going to keep putting off further analysis on those markets until I see more in the way of clues. The one I am watching the closest for reasons that I have highlighted lately is the CRB Index and I will be doing a more complete update on it very soon.
 

Charts for the Day:  There are basically 3 components that I look to when I am trying to find a market top: time, price and pattern. The first, the time component, can be difficult to nail down although sometimes when nothing else works, it will. The timing for the December low looked very good for either Friday the 17^th or Monday the 20^th and it looked that way from way back in November and even earlier and as it turned out the low came on Thursday the 16^th. But timing alone can be difficult to trust and therefore it is most helpful to have price targets in mind and hopefully when they are reached, timing and/or pattern can be used as a confirming tool. The chart I am including today is one that I have posted several times before but with a few updates to it. It is the daily chart of 10-year futures with 2 sets of Fibonacci retracement targets posted on it, one from the 11/04 top drawn in yellow and the other from a secondary high made on 11/23 drawn in red. I’m still not convinced which of those moves we are retracing but I find it interesting that the 38% retracement of the move off of the early November top and the 50% retracement of the move off of the late November high are very close to one another. So far the 38% level marked in red is doing a pretty good job of holding prices back and it is also very close to one of my several wave-equality targets. As you can see, I have drawn 3 wave-equality targets on this chart, all marked with ‘100%’ labels and while there is good reason to do so based on wave theory, I won’t go into them here but if you’re interested, email me and I will try to send you out an explanation. Finally as you can see, I have also drawn a channel on the chart as a further guide to use during this rally. Wednesday is the only day this week that I find any interesting timing associated with As far as pattern goes, I have several potential counts and one would have us at or near the beginning of the 4^th wave of the C-wave. That fits well with the timing for Wednesday. I’ll update the patterns tomorrow in hopes of zeroing in on time, price and pattern but this chart is a good start for a roadmap.

   
Summary:   I’m inclined to think the markets will still trade higher but not yet convinced the rally won’t run out of steam this week. When I include the 30-year in my analysis that seems like the best scenario so I want to be very cautious around any good objectives and I would not want to play the long side without stops in place. As long as things look the way they do now, I would like to use 119-31 as a stop on any long exposure while looking to sell against 121-05/07 but with the 10’s currently trading in my 120-28+/31+ band of resistance, a better idea if they open at 120-28 or above might be to move the sell-stop up to 120-19 and trail the market up from there.

1/07/11 – 9:15 – The initial reaction to the jobs numbers was anything but muted. Both the 10’s and 30’s managed to bounce in the vicinity of a point in a matter of seconds following a highly unusual Labor Department report. The first posting I saw showed the NFP number to have declined by 103,000 vs. expectations of a 160,000 increase but that was an error as the actual number showed an increase of 103,000; still a friendly surprise. I don’t know if that error was from just one reporting source or not but I imagine it contributed to lost dollars on the part of somebody. Meanwhile, the Unemployment Rate dropped from 9.8 to 9.4% while consensus was at 9.7 so by any measure the report came as a surprise. Problem is that while the NFP component was a bullish surprise, the unemployment rate was a bearish surprise. So that’s it for the numbers but what does it mean for the markets?

For starters, the cash 5-year and 10-year already have outside days – currently positive outside days – so if they can close beyond the ranges of yesterday they can be read as having made fairly meaningful reversals. By virtue of having so far failed shy of the 120-23 print from Wednesday, the possibility that we are witnessing the E-wave rally of the triangle on the 10-year futures chart shown then and again this morning remains real. The strong reversals in cash, however, make that count seem unlikely so absent a secondary reversal back to the downside, I would expect to see the rally continue into next week. The objectives that I showed in the charts of all of the maturities posted over the past several weeks, as well as those shown on the 10-year chart posted this morning, are still the best ones that I can come up with. As much as I have been and still am anticipating a move back through the lows, another reversal today wouldn’t shock me but I would use the mid-point of the range of any chart you are looking at as the spot that will signal if that is happening. That point on the cash 10-year is conveniently close to yesterday’s close at 3.419 so my call is that if you see a trade back at 3.420, things could get ugly. Absent that trade I suspect the rally will push into next week and we can make a determination on Monday as to how far it will extend and where we are in the wave count. Basis the 10-year futures, I would use 119-28 as my trigger point regarding a potential secondary reversal today. As I look at things right now, I see the futures with a low of 119-17, a high of 120-15 and a last of 120-06. Anything can still happen. The safest of stops in either direction would be a new extreme for the day. If that low is too far away for you then use 119-27 as a sell-stop but that is a little risky. As far as closes go, any close below 120-09 in the 10-year would represent a lower weekly close and that wouldn’t be very constructive but the safer numbers to use as a ‘heads-up’ indicator going into the weekend would be yesterday’s closes.

8:15 – The time has come to find out what’s in store for the bond markets. After 2 weeks of holiday trading and most of another waiting for the jobs report, it’s finally here. I’ve been convinced for a while that treasuries are headed lower in the not-too-distant future but all of the analysis in the world isn’t going to tell me what they’ll do today. Many of the Wall Street firms have revised their estimates for NFP to the upside following Wednesdays shocking ADP report but you can bet that they adjusted their positions when it was released so it is difficult to anticipate what might happen even if you knew what the number was going to be. Following the release and presuming that the markets actually react to the news, I will try to send out a second update with my best guess on just where we are in the wave count but for now, let’s just pretend like there are no numbers to deal with and take a look at things as they currently are.

Yesterday’s rally was accompanied by better volume than what we’ve seen since 12/17 with one exception – the day before. In other words, while volume is coming back into the markets following the year- end holidays, it is still relatively low on the rally days and stronger on the down days, which is exactly how it was before the holidays. Price usually moves with volume and as long as the rallies are driven by less volume than are the breaks, the upside should be limited. The Stochastic oscillator has turned down from just short of being overbought while my Cycle Stochastic has turned down from well above what would be considered overbought. The RSI does not fit that pattern as it has yet to get above 50 meaning it remains very neutral. I rarely look at moving averages but for whatever they are worth, the 10’s are below averages from 13 bars on up. My Price Proxy has turned back to the upside as I had reported on Wednesday and that bothers me a bit given my negative bias so we’ll just have to see how that plays out. As far as wave structure goes, as I have said on numerous occasions before now, I can make a case for the 10-year to have bottomed in an impulse that began in October as well as one that says it needs at least 1 more new low before a bottom will be in place but I cannot make any case for the 30-year to have bottomed. What is more important with regards to all of the treasuries but especially the 10-year is that from the lows, the rally clearly looks to be corrective so there is little evidence that the 10’s and 30’s will not ultimately trade much, much lower and most of the evidence says they will trade at least a little lower before the first impulse comes to an end. One more thing I thought I would mention is that yesterday’s high was at 120-00 while the gap left from the day before started at 119-31+ so as you can see, there were enough sellers willing to sell into the first obvious resistance area to stall the rally and that’s never a good thing.

Other markets:  The SPX traded in a small range making a slight new high but closing a little lower. There’s no reason for me to try to read something into nothing. I still suspect stocks will still trade higher and I still don’t have much of a feeling as to whether or not they will exceed my next target at 1290/91. Should they trade off from current levels, there should be good support at the gap left on Monday from 1259.34 to 1262.66 and below that, 1251/54 but even trading down to those levels will not necessarily mean much. I’ll try to update the SPX along with the bonds later this morning.

 Other than the Dollar Index firming up nicely yesterday, the other markets I like to address were very quiet and they, too, are likely waiting until for this morning’s report. I can’t emphasize enough how important I think that high in the CRB could prove to be. It was extremely close to a potentially rally ending target and the only way the CRB Index goes down is if commodity prices in general go down and if we’re talking about a large move, that could have implications on all of the other markets that matter to us.

Charts for the Day:  I’m including a daily chart of the 10-year, about the same chart I sent out on Wednesday, showing the potential triangle, the Fibonacci targets above, a trend-line drawn down off of the November highs, my wave-equality target and an upper channel line. While the triangle only shows up on this chart, I am still focused on it simply because it has worked so well. Remember that I sent it out before the big break on Wednesday and that the E-wave rally is the one wave within the triangle that does not have to meet its objective. At the end of the day all roads seem to be leading to the same destination and we’ll just have to see which one takes us there.

Summary:   I intend to do an update following the release of the jobs data unless the markets just don’t move enough to warrant it. If the 10’s were to trade above 120-05, they would appear to be headed to at least 121 with the caveat that the potential triangle I showed on Wednesday can still be in play. If it is then any failure from anywhere this side of 120-21 could be the end of the E-wave from which new lows below 118-17 could be expected. Above 120-21 I will be focused on the same 3 target areas I have talked about for weeks; 120-26/31+, 121-05/08 and 121-23. I should be able to close in on the best area before we get there assuming that it doesn’t happen all at once. On the downside a trade below 119-04 would suggest a move back to the lows at 118-17 is coming but with no suggestion as to whether or not they will hold the first time they are tested. I guess what all of this means is that my buy stop would be at 120-06 although a safer one would be at 120-22 while my sell stop would be at 119-04

1/06/11 – 8:15 – The ADP employment report showed just how vulnerable the treasury markets really are and while the interim report I sent out with the chart showing a potential triangle looked pretty good at the time, even that pattern was called into question by the time the markets had closed. The fact is that now only the 10-year futures retain any resemblance of the triangle in the position that I had shown with either a slower developing triangle, a flat correction which still needs to see the 12/16 lows tested or an all out collapse to new lows being the remaining alternatives for the 30-year and the yield charts. It’s actually fairly academic at this point anyway since within a triangle, the E-wave is unpredictable and can’t be counted on to go back to the upper trend-line so with the jobs data tomorrow morning, as long as the lows from yesterday produce any sort of bounce, the triangle can be the correct count for futures while the other markets don’t need to be in one to produce the same outcome. The bottom line is that wave theory is telling me that new lows are coming with or without any more upside first and tomorrow could determine whether or not there is any.

 As we approached the timing window I had for the 17^th to the 21^st of the month which coincided with the beginning of the holiday season, I suspected we would see a reduction in volume both because of the holidays and because that would be consistent with the notion of a counter-trend move. It was equally logical that when the volume returned sometime early this month, the sellers were likely to re-emerge and the lows would be in jeopardy. Yesterday’s break was no doubt news driven with the ADP private sector jobs report showing a far bigger increase than anyone expected but with the bad news came a return of real volume and for the first time since the day before the 12/16 bottom, the volume exceeded the 50-day average. With that jobs report showing the bigger than expected increase and especially with the hard break, similar news on Friday may not produce the same results and until the lows give way, a wave-based case can still be made for another trip up through the trading range but like the old Midas Muffler commercials used to say, ‘pay me now or pay me later’. I don’t think that we’ve seen even a near-term bottom so whether or not we get a rally from the upcoming numbers, there should be more downside in store. If tomorrow’s news isn’t friendly, keep in mind that the high yields left on 12/16 are now less than 10 bps away in both the 30-year and the 10-year and from anywhere beyond those yield crests a more meaningful low can be made. I do want to see 5-waves down into any low before I would want to be a buyer and I don’t think any such bottom will be the end of the bear market but from the end of the next impulse wave down, there should be a more sustained rally than what we just saw and that’s at least something to consider.

 Other markets:  The early weakness in the S&P futures went the way of the ADP jobs report and the gap left on Monday remained intact as the SPX closed in new high ground at 1276. Everything continues to look good for a push towards 1290 and whether or not it will extend beyond that target remains to be seen. If it can then I see some resistance at 1306 and 1313 but those are only resistance levels and not objectives and I haven’t yet made a determination as to just how much further the stocks are likely to go if 1291 gives way.

The massive downside reversals in Crude Oil and the CRB were reversed to some degree yesterday but those markets are far from out of the woods in my opinion. Even if the CRB can go back through the highs, until it can exceed 340, I wouldn’t trust it and the implications of a top in the CRB go way beyond Gold and Oil so we need to keep an eye on that market. Gold didn’t fare nearly as well as Oil and it still closed lower for the day. If Friday’s Labor Department report shows the kind of job growth that the ADP report did, the asset markets may well head back up but I think we’ll need to get past that report before we find out if the big downside reversals are real. 
 

Charts for the Day:  Rather than post a chart just for the sake of doing so, I will wait until tomorrow and following the jobs data, I’ll put out another interim report showing what appear to be the preferred wave count/counts for the 10’s and 30’s.  
 

Summary:   Other than the 8:30 Claims numbers, there is no other scheduled news before the Labor Department numbers tomorrow. If the markets don’t get rocked by that little gem then I suspect we will head into tomorrow’s report with about the same look as we have now. While the 10-year futures still have a good chance of being in a triangle with the potential of seeing another push into the 120’s, the other charts all suggest that this recent move down is a B-wave with targets at or very near the 12/16 lows. That is based on the fact that the move down currently appears to be a 3-wave move but the problem with that statement is that any strong acceleration to the downside can turn what now looks like a 3-wave move, into a 5. With a gun to my head I would prefer short exposure to long exposure but without much conviction unless I had no concern for what might happen over the near term. I am still not dismissing what can prove to be a very bearish count going forward but one that would allow for this correction to extend for another several weeks and 25 or more bps; that being the idea that the impulse that began in October ended in November and we are in a large wave-2 correction. What will follow will not be pretty but it also won’t likely happen just yet. In any scenario that I see, we still need to trade lower. For today I would look to sell into a move to the gap left yesterday at 119-31+/05+ while using 119-03+ for a stop on longs but with the early strength I am seeing, I think trailing the market with a 9-tick stop actually makes more sense.

1/05/11 – 8:15 – The Treasuries have caught a bid this morning and are currently trading around the highs from yesterday. Upside gaps remain a possibility but with or without them, this could prove to be the push into the 3^rd wave rally that I have been anxiously waiting for. Following a rally yesterday morning, they weakened into the close with the 10’s and in closing slightly higher on the day while the 30’s closed lower. It was disappointing from the standpoint of wanting to see a rally develop quickly for my preferred wave count to hold up, enough so that I began to look more closely at the potential wedge that I mentioned in yesterdays update. There is still no indication that the entire corrective rally has ended since there is no evidence of a 5-wave decline but if today’s early strength evaporates, it will leave me unsure of just where we are in the correction. If the B-wave has bottomed, then we should be able to find either a clear 5-wave rally for a C-wave - or a wedge. In the former scenario, trades below 119-29+ would seem unlikely while in the wedge scenario 119-22 must hold. One more thing to consider is that the longer the correction persists, the greater the degree correction it would appear to be. That’s not a good thing since there is a way to count the 10-year as having ended an impulse wave from the November yield crest and if that is the case, then this correction could persist for several weeks and goes as far as 3.10 or lower but it would likely be a wave-2 correction and once it completes, a huge move up in rates could be expected with targets in the area of 4.50 not unrealistic. I think that’s coming sooner or later but I’m currently in the ‘later’ camp. For now I still suspect the 10’s are in a minor 4^th wave correction that will give way to new lows in the next week or so and likely in the area of 3.75 before a bigger corrective rally ensues. That count looks a little better to me for the 10-year and much better if one considers the 30-year as well. A move through 3.17 and especially one through 3.14 would suggest that the larger degree correction is the better count.

Once again, volume picked up considerably yesterday but it was still lower than the 50-day average. I think it is still indicative of a market that will see higher levels near-term but not that much higher. It still seems to fit the pattern for a corrective rally and should it began to tail off as the treasuries push to new highs above 120-26 that would be just one more warning signal. As you could probably guess, the oscillators did little since the closes were not far from unchanged. My Price Proxy has turned positive – just yesterday for the futures but 3 days ago for cash.

Other markets:  Yesterday was an inside day for the SPX and I have nothing much to add to my recent comments. If the jobs data doesn’t get it first, I’m expecting a move to near 1290 and as long as the gap left on Monday remains, prospects for such a move look good but that gap may get tested early today as the futures are under some pressure. That gap fill would take place at 1259.34 which would be down about 11 on the day and currently the futures are off about 8.

 I mentioned yesterday that there had been reversals in Gold, Crude and the CRB but that they were not convincing ones. I wished I had been more convinced. Gold closed down about $35 while Crude traded with 4 different handles, eventually closing $2.24 lower. At one point it was more than $4 below Monday’s highs. The CRB was down 5.29 and the disturbing part about that is that the high on Monday was at 335.32. My objective for the rally, first mentioned months ago when the Index was still below 280, was from 337 to 340. The 337 objective was based on a 50% correction of the bear market from late 2008 into early 2009 and at Monday’s high the rally had retraced 49.36%. That should be considered close enough for most government work and what happens from here could prove quite interesting with regards to all commodities with implications that could go beyond there.

 
Charts for the Day:  I had prepared a chart for today which depicted a potential triangle that was developing from the lows of the 16^th. With the overnight strength that pattern seem about to break down. I’ve decided to drop the chart but if today turns into a failed rally and the pattern still makes sense tomorrow morning, I will post an updated version of the chart.

 
Summary:   My preferred wave count is likely to be tested one way or the other this morning. A move above 120-26 would be a strong sign that the 10’s are in a C-wave rally and rapidly approaching what could prove to be terminal targets in front of Friday’s jobs report. A failure to trade above that level, especially accompanied by a move back below 120-04 would seem to leave them either in a wedge to the upside or perhaps still in their B-wave which could mean a move back to the lows and of course, a failure to new lows remains a possibility. I don’t need to remind you that my analysis tells me it is only a matter of ‘if’ and not ‘when’ those lows give way. I would use 121-00 as a stop on any short positions but I should point out as I did yesterday that solid resistance continues up to 121-08. As far as long positions go, my stop for today would be at 120-03.

1/04/11 – 8:15 – The treasuries closed lower yesterday - 5 ticks in the 10-year and 19 ticks in the 30-year - but to me what was more important was the fact that the 10’s closed 21 ticks off their lows and the 30’s more than a point off of theirs. That seems to me to suggest that they are still in a correction. As expected, the volume picked up, exceeding any we’ve seen since 12/20 but it was still well below the 50-day average. I would imagine that the entire week will be characterized by a slow return to more normal volume. Yesterday was one of those days that can be deceiving with regards to volume analysis. It was a down day but the lows were in place by 10:00 and the bulk of the intra-day trades occurred as the market recovered so the increase in volume needs to be viewed as if it had occurred on an up day as far as I’m concerned. The volume is still not very impressive and that’s the way it should be if the move that began at the lows on 12/16 is a correction.

 I spent a lot of time talking about oscillators yesterday even though I hate relying on them so today I want to focus more on the wave structure. I’m obviously of the opinion that the treasuries are in corrective rallies and if that is correct, then the next step is to determine just where in the corrections they are. It’s fair to make the assumption that the 10-year has completed its A-wave and I believe it may have completed its B-wave as well although that count does need for the rally to intensify very soon. If the B-wave is completed then we have also seen wave-1 of the C-wave and what should follow is a 3^rd wave with all of the characteristics of any 3^rd wave; it should be swift and powerful and when it is done, the pullback that ensues should not carry back below the top of the 1^st wave which is at 120-08+. If that is not the correct count, then I think the alternative is that the B-wave is yet to complete in which case the correction would likely prove to be a ‘flat’ and that would mean that it should bottom very close to the 118-17 low from the 16^th. If the 10-year takes out 119-15, I think that becomes the most likely count. While my interpretation of the wave theory would suggest a quick rally and nearly as quick of a failure, the oscillators that I showed yesterday seem to suggest that more of a sustained rally is likely and yet common sense would seem to say that it’s all about Friday jobs data. We’ll see who wins.

 
Other markets:  The stocks started the year off with a bang. The SPX closed up more than 14 points to just below 1272 and that’s enough for me to look for my next objective at 1291. The volume was a tad below average but still much better than any recently and in fact it was greater than any since 12/17. My 1290 objective is based on wave theory with a little Fibonacci thrown in but now a trend-line drawn up over the highs from August and again November has reached 1282 and increases about 1½ points per day. Tuesday would be the day that the trend-line hits the 1290 target so that might prove interesting if the rally makes it through Friday.

There were potential reversals in Gold, the CRB and Crude Oil but they weren’t very convincing and I’m going to wait another day before commenting on them. The Dollar, which had a bad day on Friday, tried to recover and closed higher but near the lows of the day and that, too, is a market that I need another day to try and figure out.

  
Charts for the Day:  Today I’m posting an hourly chart of the 10-year with my short-term ‘preferred’ count on it. The ‘preferred’ part could change pretty quickly if the rally doesn’t begin to gain momentum but for now, this is it. Included are the Fibonacci retracement objectives of what I think is the 3^rd wave shown in yellow, while the retracements of the entire move from the November top are shown in red. My wave-equality target is the ‘100%’ label drawn in grey and I’ve included a trend-line off the November top. Right now that’s a lot of numbers but wave work is all about the process of elimination and I hope to be able to eliminate several of these in the days ahead. If the wave count is correct then we are about to enter into the 3^rd wave of the C-wave and I would think that very soon, the trend-line will have come down too far to be a realistic objective. Remember, if this count is correct, then there should be a rally followed by a pullback that remains above 120-08. Actually C-waves can take the form of wedges which would eliminate the need for the pull-back holding above 120-08 but for now that does not seem to be a good option. I’ll address that possibility if the structure dictates.
 

Summary:   The low yesterday was a tick below my suggested stop - ouch. Nobody said this was easy. I think the correct way to approach the markets as we get closer to Friday is to continue to tighten up stops whenever possible. Today I would use 119-22+ as a sell stop since if it is taken out, the risk that the B-wave has yet to bottom becomes quite a bit greater in my opinion and that means we could see trades near 118-17. I would also use 120-16+ as a buy stop but that one comes with a caveat. I see 120-15+ as only minor resistance while a much better level exists at 120-26 but that one is so close to my next 2 areas that it seems to me you either need to use 120-16+ or stretch it all the way to 121-08 and I don’t think that would be a very good idea. Hopefully pattern development today will help with money management tomorrow. I still have a short-term upside bias.
 

1/03/11 – 8:15 – The 10’s managed to rally on Friday but stalled right at my first resistance area and on the lowest volume of the entire holiday season; possibly even for the year but it’s hardly worth the effort to check and see. The fact is that the volume for the entire week was abysmal and on a weekly chart it is easy to see the last time volume was this poor; it was the same week one year ago. If you recall, I had felt the timing for the 18^th to the 21^st of last month was prime for a reversal but the wave patterns made it look clearly like any low would be only a 3^rd wave low at best and not a true bottom and I still think that is the case. The low volume was no doubt a function of the holidays and to some degree the weather but typically decreased volume is also a characteristic of a corrective move so unless I see the rally extend considerably from here and with a good pick-up in volume, I think the main focus needs to be on finding a place to be a seller on a position basis. The futures chart looks like we made a 3^rd wave low which could hold a little longer than would the lesser degree, partial 3^rd wave termination point that the yield chart seems to suggest. In either case I continue to think the rally is corrective and needs to be sold.

 I spent some time last week going over objectives for the correction and while they remain about the same with some adjustments needed to accommodate trend-lines, wave structure matters. Since C-waves are 5-wave structures, over the course of the next several days I hope to be able to zero in on not only a preferred objective but also a likely time for a high once I get a feel for where in the 5-wave move we are. Even if I can do that, however, there will be a lot of risk associated with carrying a position into Friday’s jobs data. For now I’d be watching 120-31 as an initial target in the 10-year with 121-05 to 121-11 a better one and 121-23 about as far as I can see this rally carrying without needing to make some adjustments to my preferred wave count. I would keep an eye on the charts I posted last week for the cash objectives as well as those in the 30-year. The only area that is sacred with regards to ‘needing to hold’ is the low of the move made back on 12/16. In the 10’s that would be 118-17. One thing that I do see and that you can see as well if you look below at my support and resistance numbers is that if I have done my work correctly, then there is plenty of intermediate resistance ahead in both 10’s and 30’s but little in the way of intermediate support. That alone should make continued upside progress difficult while leaving the markets vulnerable to any negative news.

 My favorite directional indicator, the Price Proxy, remains in a sell mode but I know it is close to turning since it has been flashing a buy at times during the past several trading sessions on an intra-day basis though not on a closing basis. The traditional stochastic is headed up but not yet in overbought territory although my preferred cycle stochastic is overbought. A 9-bar RSI is headed up but only at about 50 meaning very neutral while the MACD is also pointed up, both seemingly suggesting continued improvement. None of those indicators take volume into consideration, nor do they have anything to do with Elliott Wave analysis which is why I don’t rely much on them but other traders do and for that reason they are worth paying attention to. It’s often said that more than 90% of people who trade markets lose money so knowing what they are looking at has its merits. And with that in mind, I would be remiss if I did not mention the fact that my cycle stochastic, the traditional stochastic and the RSI have all turned up from oversold territory on a weekly chart and if they are to be trusted, then perhaps my preferred wave shouldn’t be. I’ll go with my wave work but you might just want to keep this in mind if the rally begins to overshoot objectives.
 

Other markets:  Gold finished the week and for that matter the year on a very positive note with a $17 gain on Friday. The CRB was strong as well with a close at 332.80 and is closing in on my 337/340 target area. Crude Oil also had a big day on Friday closing up about $1.50 after having been down nearly $1. While commodities were all in a strong rally mode, the Dollar Index got clobbered. I like the long-term pattern in the Dollar but I have to admit that the rally from the low in early November is both confusing and disturbing to me with regards to wave structure and I would have to stand down from any long exposure on a trade below 78.20; Friday’s close was at 79.03. That brings me to the SPX which softened a little on Friday. It spent a little time on both Thursday and Friday above 1260 but never managed to close there. Volume was very low all week long making it difficult to trust the moves but any penetration of my 1260 target accompanied by increased volume would be reason for me to focus on my next target area around 1291. The S&P futures are up strong this morning and the volume will almost certainly increase considerably today so I’m thinking we have begun a new leg up.
 

Charts for the Day:  Having told you that I don’t care much for indicators, I thought for today I would post 2 charts of the 10-year futures - a daily and a weekly - with the cycle stochastic, the standard stochastic and a 9-bar RSI on them. These are more for your benefit than for mine but I must admit that I will keep the picture of the weekly chart in my head whether I intend to or not - at least until the wave patterns resolve themselves. One thing about the oversold pictures depicted by the weekly chart is that a round of new lows that doesn’t last too long may very well produce bullish divergences which are the only patterns made by oscillators that ever really seem to matter so from that perspective, they don’t have to be in conflict with my preferred wave count.

 
Summary:   The treasuries are under some pressure this morning. I had expected them to rally through the holidays but shift back into a sell mode once the players returned although I can’t say that I thought it would necessarily happen this quickly. Remember that the initial high of this move made just 2 days out of the low was at a 38% retracement target for the 3^rd wave that I felt we were correcting so that remains a concern. Still, the pattern suggests to me that the correction is ongoing so I don’t want to get too aggressive on the sell side just yet. Traders may still be timid this week with the jobs data pending but that can be a game changer. I would be using 119-16 as a stop on any longs with 120-19 my stop for shorts. I will be tightening up the money management levels as the week progresses.

 December 2010

November 2010

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December 2009

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