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That's How You Bounce On Support
Submitted by Nic Lenoir of ICAP
I shall not comment on the GDP number, nor the fact that estimates were revised down yesterday. Anybody who pays half attention to the market knows that it is an old trick used on a down day ahead of numbers to suck the last sellers in before the bounce. Last NFP day is a good example that should be fresh enough to most traders' memories. Let's focus on where we are now after this rally.
First, I hate to admit it since I am bearish, but today was an obvious move. Looking at EURUSD we tested the bottom of the channel on the sell-off and flirted within half a figure of the 50-dma. S&P futures came close to the 1,032 support of the bullish channel as well yesterday, and gold tested the 1,026 support area. The move today is brutal, and we need to look at the levels to watch to determine whether this is another ramp up, or if this bounce needs to be sold.
For the S&P future 1,070.50 is the line in the sand. If we go beyond then game over, new highs are upon us. On the Dax future we are back testing the former support of the channel, now resistance around 5,600. The 50-dma is at 5,609, right above us, and the key barrier would be on a further push 5,713, which corresponds to 1,070.5 in S&P future and would invalidate the impulse structure of the sellf-off the past few days. I would argue it is worth selling the Dax around here rather than any of the other markets. That will require discipline however when watching the stops. EURUSD we are already back on the overlap we broke the other day at 1.4845 and we have retraced almost 50% of the move already. Selling here requires to be religious respecting the 1.4974 stop, but the 1.4920/1.4974 is probably a better zone to reload on shorts. Gold is back almost on the resistance area between 1,050 and 1,055. A break past the top of this range probably invalidates further weakness as well.
If you want to play the carry I will bring attention to GBPUSD. I think you are still exposed to weakness for risky assets until you break the resistances mentioned here above, but GBPUSD is a trade that could work either way. Given it has decorrelated recently from the rest of the short-USD/pro-risk space it could be one way to play the anti-US theme without getting annihilated if equities do sell-off further. GBP has partly become a funding currency for carry trades. We had a H&S triggered on 09/24, and we retraced 38.2% of the rally since March 11. The correction shaped into an ABC with C=A. We have broken back above the neckline and the 50-dma, and on the pull back a few days ago we tested and held succesfully the moving average. It looks like a perfect technical set-up for an acceleration higher. Of all the pairs against the USD, it is the only one that offers a compelling bullish case other than just following the trend. The upside target if the move plays out is 1.7902, so the upside is quite significant, and a break below 1.6263 (the 50-dma) and the former neckline should be used as a stop on a close.
The Fed has now completed its treasury buy-back program. It will be interesting to see if the US Treasuries market comes under pressure as a result, especially given that the 7-year auction did not go that well today. Maybe the fact dealers can't hope buying at auctions to sell it right back to the Fed at a profit means they won't be buying. It is well documented that Treasury dealers have had a relatively easy time taking a commission on bonds issued by the Treasury and headed to the Fed's balance sheet, and POMO reports have shown that bonds purchased by the Fed had often times been issued in the weeks or even days before the Fed bid on them. More on the yield/risky-assets relationship later, for now let's see what charts say about the 10Y Treasury futures, and the key support levels to watch that would indicate yields are about to rise aggressively. The 180-minute chart shows we have a potential H&S triggered if we break 116-29 on the downside (I would observe the break on a daily close). What is even more interesting is looking at the weekly chart, one realize that this H&S is itself within the shoulder of bigger picture H&S. The big picture neckline is just about at 113. The next support below that is 106-21, so it is very important to kee all of this in mind. My conviction is that if equities push much higher here past 1,070.50 instead of retraceing we will go test the 113 level. A full point for the Treasury contract is about 14.4 basis points in yields, so that would imply rates would be 75 basis points higher for the 10Y Treasury approximately. I think if we get there it would put enough of a lid on recovery hopes that stocks would sell-off and balance the move in Treasuries. With the Fed no longer purchasing Treasuries, it is hard to contend equity markets can keep going much higher, even though some will argue that MBS purchases will still put pressure on overall rates.
Good luck trading,
Nic
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Still waiting to see if Ole' Bobby Prechter is right "Sell S&P 500 @ 1100"
It already got to 1099. That's close enough for me.
It printed at 1101.
But he means close there, in Gold equivalent, on a log scale.
What has happened in the last week is just an overture. The symphony is coming.
So, another 0.41% higher and game over? That's not very far away.
how can someone in their solid minds give such a precise number up to 0.5 point of SP500? For me it negates everything he said. Do not even bother to look at his 50 charts...
I agree 100% -- I stopped reading right there and then. No more Nic.
Bonddude, what do you think about 30-yr yield direction? Prechter thinks they're going to 5.0 or higher, but I don't see it. The last time 30-yr yields have seen 5.0 is August 2007. Yields appear in a clear downtrend, both long-term and short-term. There's an unbroken downtrend since 1977, and a downtrend since June '09 where they topped at 4.79. It appears more likely that yields go lower if risk-aversion sets in. Any move higher in the dollar supports lower yields on the long-end. Thoughts? Thx.
A trillion thoughts before the midterm elections, then cowboy up for yields.
WOW! What a racket! My crystal ball says there's only one last N20 tank left, the question is, how much weight have all the new offerrings put on the market, no nitrous, no happy bull.
As someone said earlier (probably around here), you will see "Caribbean Banking Centers" volume increase spontaneously now. Imagine that...
I will fully say it "took a pair that clinked" yesterday for me to buy EURUSD into the slide. I blew my wad by the time we tapped 1.47 - Bout wanted to cry uncle. Today, I was rewarded and I live to see another day. :)
I'd bet on a spike in 10yr and 30yr yields. Simply based on the notion of what could cause the most pain to the most traders. After the spike in the spring it seems plausible.
https://www.efanniemae.com/sf/servicing/prp/
New program like the HAMP. To bailout speculators and people's beach houses.
Payment Reduction Plan (PRP)
Includes non-owner occupied properties (investment properties and second homes)
The amount of moral hazard just went up another level.
"one way to play the anti-US theme"
Gotta love it.
Nice charts. Thanks.
Good technicals today Tyler ! - Can't find a good damn fundamental reason to be in this market , but the techncals seem to be working okay - yup... another bounce off the 50d like clockwork . ,thanx
So did everyone cover their shorts yesterday at close? Just wondering
Nah. Closed too early. Closed at 11. Not enough nerve to wait for 3:50.
yep. closed CRE shorts at 3:30.
I'm no technician. Unless one buys the idea that long-term yield bottomed earlier this year and are reversing a downtrend that began at the end of 1981, it's hard for me to see that yields will go higher this year. With credit still imploding and the money supply shrinking, I believe rates will stay low for a few more years before inflation concerns take over.
The powers that be needed to keep the happy juice on until the elections on Tuesday ... then they can focus on how to have the pixie dust really kick in next summer before the midterms.
As I recall, the POMO 10 Year buy volume was the lowest. My guess was the "Long T buy" program after inception morphed to a real-time interest rate play, with the priority going to issues under 10 year. But, I have to admit, with the facts I have, the distribution criteria is not immediately obvious.
The MBS FED buy program is also interesting in how it may or may not effect economic growth. It seems though, the market may put confidence in its premise to deleverage debt. But, what does the FED do with all these securities? Trillions worth of debt boat anchors. Hmmm.
The sad realization is that perhaps they represent a 50% to 70% loss when purchased. Actually, to me this makes a lot of sense in a workable solution from the FEDs point of view. Essentually, a deleverage free gift to the Banks and the GSEs (Banks again). What happens when the securities stop paying interest? What happens when price reductions and defaults make them worth pennies on the dollar? What will be the FED response?
My guess is on the whole, there will be no response, they will be written off. If writing something off conceptually even applies to the FED.
Comments??
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The FED's securities will go silent into the night, weak and feable, fallen by the wayside, quietly forgotten -at best.
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It kills me that ppl who are continually so wrong with their predictions, continue to make them. EW is completely discredited in this market, the fed and gov hv control, why do you bother with it?