SP500 quiet,,,,+ 10 Year note comment.

The SP500 continues to churn within the consolidation zone of the last 2 weeks. A sustained break of either side of the approx 1130/1150 range is needed for this to start gaining some momentum in either direction. My bias is neutral at the moment, with the more bullish technical arguments offset by some concerns that highlight a potential bearish resolution. I covered these extensively in Friday's post, they can be seen by clicking here.

G7 10 Year yields are once again pushing the recent lows. JGB 10 year yields, which had rebounded sharply from 0.90% to 1.2% little over a month ago are once again threatening the 0.90% lows, currently they reside at 0.93%. German 10 Year Bund yields are at 2.24% having only recently rebounded to 2.50% from around 2.10%, and US 10 year yiel , which had rebounded in late August from 2.40% to 2.85% are back to below 2.50%. All three yields charts can be seen below. -

  

With regard to the US 10 year yields, I still favour these to push towards 2.20% and probably lower. There is a chance that the recent rebound may be a precursor to a deeper correction, with this move a re-test of the low and perhaps the early stages of a trend change, however I feel this is the less likely scenario. The next chart shows the US 10 Year Note continuation future weekly, the correction in yields shows up on this chart as a Bull Flag, with a strong Bullish breakout over the past couple of weeks. I have highlighted a strong similarity between the Bull move in 10 Year notes over the past few months and the late 2007 rally into early 2008. I have also added extra emphasis on the current Bull Flag and breakout and a similar pattern in Dec 2007,  whilst a repeat is not guaranteed the similarities are quite striking, and I believe this supports the idea of higher 10 year note prices/lower yields in coming weeks.  

Rates Update + SP500 may be getting ready for break higher.

Global Rates

The past couple of weeks have seen some very sharp corrective activity on Rates markets. This corrective phase has occurred in the face of very sharp drops in Government Bond yields over the past few weeks and indeed months. There have been a number of events which have helped contribute to the large drop in yields over the summer, chief amongst these have been 'Flight to Safety' fears regarding the Euro Periphery (PIIGS), Double Dip fears as US economic data disappointed over recent months, poor economic data in other G7 countries, and the increasing belief that Central Banks were going to increase Quantitative Easing in response to fears of further economic pain.  - Is this the beginning of a real turn in the rate environment or a mere correction? - Personally I think this is too early to come to any firm conclusion, however it is something I am going to try and focus on over the next few days and weeks as this is likely to be a barometer of the level of fear and/or confidence running through the global economic environment.

My initial feeling is that this is a correction in rates for now, which probably still has further room to run. - Regarding the issues above, the PIIGS issue has not gone away, Credit Default Swap (CDS) levels remain elevated, though price levels have eased a touch over the past few days. Double Dip fears have eased slightly in the face of marginally better data over the past couple of weeks, (but still remain elevated), stock markets have recovered there poise and QE2 has not yet materialised, though it remains a very strong possibility. - The charts below show US 2 year and 10 year yields, German, Japanese and Australian 10 year yields. --- I have highlighted the Japanese 10 year yield level of 1.20%, this has been a pivotal level for the past few years, the recent collapse in yields across the G7 really accelerated upon the confirmed breakdown through 1.20% in June, and the rebound of the past couple of weeks in JGB yields moved from 0.90% to 1.20% before easing back to current levels around 1.6%

SP500 Index

Last Thursday's 'Shooting Star' candle failed to turn the markets down, with futures levels currently suggesting cash trading around 1118/19, it would appear that this signal is a fail. Unless today's likely stronger opening turns round to produce a weak losing close, then the focus is likely to switch back towards the 1130/32 key resistance area from June and early August.

The chart below shows the patterns which I think are likely to have the greatest influence on the market going forward. I believe the market may be preparing for a breakout higher, I have listed below my reasons for this below. However, as long as the 1130/32 continues to offer strong resistance, and until we see a clear and sustained break over this level, the risk of further consolidation or a move lower remains a possibility.   

Clues as to why a breakout higher may be due soon :

1) The large 'Falling-Wedge' pattern (highlighted above): I covered this many times over the past couple of months, including this posting from the 2nd August (Click here). I am re-posting some work I have done on 'Falling Wedge' patterns below.

 

I have long favoured that we have a Type 2 pattern (as per the above), though I have had doubts, which have led me to question that we may actually have a Type 3.  However the re-test of the breakout, which has held well, does lead me to once again think that this is a Type 2 pattern, which has bullish connotations whereas a Type 3 has a very bearish connotation. - Note: Type 2 patterns usually morph from failed Head + Shoulder pattern, which in its own right is a Bullish pattern.

2) The Higher Low (highlighted in above chart) is another supportive factor.

3) The internal 'Inverted Head + Shoulders' pattern. - I am loathe to actually call this a true 'Inverted Head & Shoulder pattern' as these would normally occur at the end of a sustained trend, however when combined with other signals, these can act as continuation patterns.

4) My own Long-Term trend following system remains in Bullish posture, it failed to produce a sell signal on the May/June sell-off. I posted a blog on this a couple of months ago (can be seen here). This system is not a forward looking system, hence I do not consider it as a trading signal, however it should not be ignored either.

5) 1970's redux. I posted about this in July, the price action since then has actually re-enforced this even further.  Below is an updated chart of the near-term comparisons, note history does not repeat itself, but it does rhyme.  (Click on the Highlighted link at start of this paragraph to see full item for bigger picture).

6) AUDJPY -- This has been one of my main risk barometers over recent months. I have previously highlighted the Symmetrical Triangle on this FX cross. The price appears to be breaking out of the top of the pattern (see chart below), if this is maintained, this would be bullish for the AUDJPY, who's moves have been well correlated with moves with the SP500 over the past couple of years.

Of course, all this will be 'by the by' if the SP500 fails to clear 1130/32, or makes a short-false break. In the meantime, I would not be surprised if selling pressure was to emerge ahead to this key area. 

SP Divergence and Bund Triangle reconsidered.

The SP500 advance over the past few days has continued, though on very light volume. I would not however read too much into this as conditions are likely to be affected by the August Holiday season. However, there is some 'Bearish Momentum Divergence' showing up on the intraday charts that could be indicative of a impending pause or correction. - That said the market does not always follow through on divergences, for one thing momentum is a secondary indicator, price is always the primary indicator, momentum is a derivative of price and time. Secondly, how effective divergence is, can sometimes depend on how advanced a trending move is, particularly on intraday movements. In the early stages of a trending move divergence can be less effective, whereas in the advanced or mature stages of a move, it is likely to exert a greater influence. -  This also adds a slight extra dimension to divergence, since how a market performs at a divergence can be crucial as to determining whether a move is in the earlier stages or at a more advanced stage. - The following chart is the SP500 chart, each candle is a 1/3rd of a trading day. This charts illustrates the above point and shows the current divergence.  - One final point, the similarities of the current market are in my opinion closer to the market in early March. At that time the index was climbing out of a correction in a rising wedge shaped formation, volume was very low, and Bearish Divergence was present, however, this did not lead to a correction.

(Click on chart to enlarge)

(The following paragraph is amended from this morning's original posting.)
With regard to the Bund future chart from yesterday. The Bund managed to break over the top of the upper triangle (descending) line, and moved up to an intraday high of 129.47 (See chart below). Unfortunately this move was less than impressive, and saw a drop back towards the upper triangle line. - At this point , I have to hold my hands up here, and admit that I may have been a touch lazy with my analysis. Usually when I look for a significant development on the Bund I will consider the behaviour of the German 10 year yield chart, - the Bund is a Future based on the German 10 Year Government Bond. In addition I should also give consideration (though less so) to the current Bund future contract in its own right, in this case the Sep 10 Future. -- The top chart below shows the Bund Continuation Future and the Triangle I have focused on for the past couple of days. The 2nd chart shows the German 10 year yield chart (it moves inversely to the Bund), the chart below that shows the current Bund Future contract. -- Both charts are showing slightly differing continuation patterns to the Continuation Bund Future. The German 10 year yield shows a Bear Flag pattern, which has thus far held, the Sep 10 Bund future chart shows a Bull flag pattern, which too has thus far held and which remains well short of breaking.  -- In conclusion I deem the break over the past couple of days as suspect, though not failed yet. However, for me a break and hold over the critical 129.46/54 area is pivotal going forward, until then, and particular in light of the Doji Candlestick produced yesterday, a risk of a deeper setback to the low to mid 128s remains possible. - Though I will add that decent dips should provide buying opportunities, as I still favour a significant upside break as a probable sooner or later. 

S+P on verge of Breakout + German 10 Year Yield

In a post a few weeks back I alluded to the possiblity of a failed Head and Shoulder pattern in a similar set-up to a failed Head and Shoulder pattern in Mid 2009. (That posting can be seen here). At the time my view was leaning heavily bearish, since then however this Bullish 'Failed Head & Shoulder' pattern has become a much stronger possibility. In addtion this pattern has morphed into a Bullish Wedge Pattern, which though it has not yet broken out, is pushing very close to resistance (a move over (and ideally a close over) 1100, will break the cycle of Lower Highs since late April). The charts below show the mid 2009 set-up and the current set-up. - Note: Failed Head & Shoulder patterns are amongst the most reliable of patterns, with a break above the top of the Right Shoulder (1131) being the potential breakout point. - Also noteworthy is the momentum set-ups for RSI and MACD both similar on both charts. 

Turning to German 10 Year yields, these have been central to the recent crisis in European Sovereign Debt, and by implication closely linked to the sell-off since late April in US stocks. German 10 Year yields were a safe-haven throughout this crisis, as fears regarding the credit worthyness of the PIIGS increased, and investors sought sanctuary in Bunds (German 10 Year Yields) and anything but the Euro. I have over the past couple of weeks made reference to how there seems to be a basing in the German 10 Year yield occurring, and how this is shaping up to look very similar, albeit smaller, than the basing in early 2009. This is continuing, and looks like it may be be starting to breakout to the upside in yield terms (downside in Bund futures). The top chart below shows the German 10 Year Yield over the past few years, with the 2 periods I have referenced highlighted. Whilst fears persist regarding the on-going weakness of the US economy, the fears regarding the Euro Sov Debt Crisis definately appear to be waning, particularly with increasing signs that the German economy, 'the engine room of Europe', faring better. This can be seen in the lower set of charts, which show German IFO Business Climate (Which was released this morning at a very strong 106.2) and German GDP (up to Q2). -This may also continue to favour the EUR over the USD in comng months. (Note : Click on charts to enlarge).

SP Index , EURUSD, and German 10 Year Yield.

The advance in US equities continued apace yesterday, the SP500 index has now had 6 solid days of gains. However, it is now running against some key levels which may check its advance in the short-term, and could even be pivotal in the bigger picture. These can be seen in the chart below: The top of the wedge and the 50 day SMA both coincided with last night's close around 1095/96, additionally short-term momentum studies (60 & 30 minute) are showing some minor divergence up here.  Also the round number 1100 possibly adds some weight to this, particularly with the 76.4%  SP Sep 10 future retracement at 1099.5.

Looking further ahead; yesterday I discussed the possibility of the NYSE advance-decline line signalling further bullish move in US equities (Click here to see this post). Today I present a chart showing the SP500 together with its advance-decline line. The SP500 advance-decline line has broken above its the upper boundary of its declining channel, which may be a bullish signal, however it would need a clear break and close over the equivalent price line to add any weight to this. I have also re-emphasised the similarity of the  price pattern over recent months with the a smaller price pattern last May - July. It is noteworthy that the Adv-Dec line for these 2 patterns are also moving in a similar fashion.

Moving on to the EURUSD (Click on chart below to enlarge), over the past couple of days  the downtrend line from the December's high has been breached, this adds to the possibility of a deeper retrace towards a cluster of targets near 1.3100. However arguing against this is considerable resistance in the form of the neckline of the Multi-year Head & Shoulders pattern (See lower chart). The neckline of this pattern occurs in the 1.2720/1.2750 zone, which continues to cap this for now. - Note a break of the neckline would not necessarily kill this Head & Shoulders pattern,  it would need to a major corrective move over many weeks before its potential downside threat is lessened .

Finally a look at the German 10 year yield. The top chart below shows another pattern similarity, again on different scales. This suggests growing possibility of a turn higher (lower in the Bund future) in yields possibly towards 2.86%. This would fit in with a scenario in these highly correlated risk-on/risk-off markets of higher stocks and a higher EURUSD. This move higher is supported by Bullish momentum divergence on the weekly German 10 Year yield chart (See Lower Chart). Further to this, I will add that the break out of the base in Mar 2009 was co-incidental to the low in the stocks, however also note how tortured price action was before finally squeezing higher. If this repeats it may go through a similar process, before finally breaking higher.

The next few days will be critical. With key earnings reports and options expiry on equities coming up, and some key pivotal level as mentioned, I would not be surprised if we were to see some corrective activity over the next few days. How far this goes will be key as to whether the next few weeks turn more bullish, or whether my prior bearish scenarios, which I have termed as currently on life-support, manages to make a return.  

TIPPING POINTS ???????!

Overnight markets across the board saw significant moves. Chinese equities dropped sharply, the various indices posted declines of around 4-5%, this has seen follow through in other Asian indices, though not as steep as the Chinese decline. In Europe the move has seen declines of around 2 - 3% thus far, and S&P futures are currently down around 1.3%. Elsewhere global bond markets rallied, leading to a further declines in yields, with the US 10 year yield breaking below 3%. It now appears that Japan, Europe and the US 10 year government yields have all broken key levels... Meanwhile the USD has posted gains versus the Euro and the USDJPY has dropped and is moving close to the spike low posted on the night of the Flash Crash. -- Also worth noting that European spreads PIIGS v Germany have continued to back up following recent declines......
I have posted a selection of charts showing significant markets and the current move in a wider context... FWIW, I believe we are possibly approaching the end of this corrective phase on equity indices, though until the lows of late-May/Early June are clearly broken, this still has the ability to confound me and prove me completely wrong.