Other markets may be pointing to equity correction.

The past 24/48 hours has seen some big swings on Bonds, FX and Equities, though ultimately in many cases they have not actually move that far. The US has a public holiday which may induce a calming effect on markets for today. A few notes on a couple of themes I touched on yesterday:

GBPUSD FX bounced strongly, and has broken the 1.6135 area which I thought may cap it. The strong bounce has also kept the Cup + Handle pattern scenario alive, though the '3 Black Crows' patten I highlighted yesterday still weighs heavily on this, for now I would like to sit back and see how this develops and whether the 1.6200 area can cap this for now.

EURUSD FX continues to under perform, linked closely to shenanigans occurring on the periphery of the Eurozone. Although it overshot the 1.3700-1.3800 support zone yesterday, it did not proceed too much further, and I think this zone may still offer some support, however the ease with which 1.3700 was broken does not bode well. 


The sustained strength of GBPUSD and recent weakness of EURUSD fits well into EURGBP FX moving lower. A couple of weeks ago this cross rejected the upper line of a large downward sloping trend channel which has been forming over the past 2 years, this suggests further significant weakness may be a theme for EURGBP in coming months (See chart below).

A couple of other developments which may be significant. USDJPY FX may be putting a base in. I say 'may be' because trying to pick or even identify a bottom on the USDJPY is tantamount to skating on thin ice. The chart below is the 2-Day Candle chart over the past 9 months. 

Also the US 10 year yield has possibly completed an Inverted Head + Shoulder pattern, the chart below shows the US 10 year yield daily. If this is confirmed over the next few trading days, yields could push back over 3% in the next few weeks

To summarise, it looks as though some of the trends of recent weeks are under threat or facing corrective forces (EURUSD,USDJPY,10 Year Yields). These markets moved pretty much in tandem with the SP500 rally in recent weeks, if a correction were to take hold on these markets, this may suggest a co-ordinated correction in equity markets over the next few weeks.

Likely to remain volatile into next week. + US 10 Year + Is Greece hotting up again?

The US equity markets continues to behave in a volatile nature, this is not surprising given the weight of news and data over the next week. A QE story seems to hit the wires about every 5 minutes, it appears that opinion remains strongly divided both within the Fed and outside. My call is that Bernanke, being the sly old fox, will pander to both sides, perhaps not doing as much as the most extreme expectations, but none the less providing a strong boost, but within that also allowing flexibility for the future so that of he needs to hit it heavy and hard he can, or if he needs to ease back he can. - I do not expect the issue to actually be resolved fully next week, thus this will likely remain an on-going theme for the next several months, adding to increasingly volatile markets. I do not think much, direction wise, will be resolved until next week at least, but clearly the news will have the ability to slice a chunk off of the market, or give it an extra boost, which is why we are seeing increasingly volatile short-term action.

Moving on to US 10 Year yields. This is obviously a central theme in the on-going QE debate, since these are likely to be one of the main tools used by the Fed in the QE operations. However, an awful lot has been priced in on these, and in the past few weeks some of the froth has started to disappear from the 10 year t-note futures markets: Yields have seen a decent pick-up, rallying almost 40bps from the low 2.30s to the low 2.70s yesterday. I had been expecting this to move lower towards 2.00%, however whilst I do not rule this out for a later trade, short-term it looks like a low is in, and the risk of a rally towards the low 3 handles is a real possibility in the next few months. The first chart below shows US yields over the past couple of years.

The chart above shows how the yield has been forming a 'Falling Wedge' pattern in recent months, whilst momentum as measured by the 10 day RSI has been diverging upwards. The past couple of days has seen a breakout from the wedge, the yield may comeback to re-test the top of the wedge, but the risk is that it holds and moves higher. - The 10 Year t-note continuation future chart is also supporting these assertions. The top chart below shows this on a weekly basis. A couple of observations which I have highlighted:

• Firstly the strong similarity between the recent price and momentum action and the price and momentum action at the interim top in early 2008, both highlighted within the mauve ellipses. Note the sharp correction led to an extended consolidation, after which the main rally re-asserted itself. 

• Secondly the similarity between the bigger picture price action and the next chart below which shows Gold weekly 2006 - 2010, in particular the price behaviour as highlighted by the large red ellipses on both charts. On both occasions the breakout of these large patterns led to strong dynamic rallies. In the case of the Gold the rally eventually led to the Gold price being well overbought in late 2009. This saw a sharp correction followed by consolidation, eventually however the rally in Gold, as we know re-asserted itself.

The market is likely to see some rebound I think before and possibly around next week's news, however the move to higher yields could be a theme in the next few weeks.  Will this affect stocks? I am not sure, historically these markets move inversely, however the relationship between these two has not been consistent in recent years. However, if stocks were to suffer a sharp drop, then it is likely that bonds rally and yields drop, thus if the above scenario above were to occur, it is likely it would happen against a steady or rallying stock market environment.

Finally with regard to Greece; there has been a lot of negative talk hitting the wires these past couple of days. One theme seems to be how, with economic conditions weaker than expected (not helped by the EURUSD recovery), tax revenue is coming up short of projections in parts of Europe, and as a result countries struggling with high deficits are now confronting the prospect that they will miss the budget deficit targets forced upon them this year. In the past couple of days things have started to stir in Greece whilst Ireland has had mounting issues in the past couple of weeks. The charts below show the 5 Year CDS for Greece and Ireland over the past 6 months, below that is a chart of the SP500 Index and the EURUSD. I have highlighted the two prior occasions when the 5 year CDS prices moved up sharply in the past 6 months, and how this saw sharp drops in the SP500 and the value of the EURUSD. In addition I have placed emphasis on the action of the past week. - If this whole Euro Sovereign Debt issue were to explode again, then the above analysis is likely to be wrong on the T-note, as US yields should drop as a safe-haven bet while equities would once again probably turn ugly. 

 

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. 

US 10 YEAR YIELD with MACD - Looking for clues.

I have been of the opinion that the US 10 year yield is heading towards around 2.20% and possibly lower for some time now. It is a topic I have covered several times in the past few months. However, a look at the MACD momentum picture, has got my attention. The yield has moved sharply lower over the past few weeks, however, the MACD has been if anything moving sideways to slightly higher. This is classic 'Bullish Divergence' [ Bullish Divergence = Lower lows in price and higher lows in the MACD], divergences between the MACD and price can prove to be very effective in identifying potential reversal in price movement. The chart below shows the current situation, with the divergence clearly highlighted. - I have looked back along the US 10 year for examples of previous price action of a similar nature.  The second and third charts below show 2 previous periods of similar behaviour from 1992 and 1995. In the 1992 incidence a sharp correction took hold pretty quickly, whilst in the 1995 incidence the yield went through a meandering bottoming process involving some minor new lows, before a sharp correction took hold. I would say that of the two, the 1995 comparison probably bears a greater similarity to the current price action.

I will however qualify the above:
    - My first qualification is that I believe momentum is always a secondary indicator, whereas price movement and trend take priority, and currently this continues to head sharply
lower. However a potential warning flag should be raised. -
    - My second qualification is by posting a chart (See Top Chart below) which completely contradicts everything I have been saying above. It is a chart of the Japanese 10 year yield from 1999 - 2001.  I have highlighted a period where a similar MACD and yield divergence took place. However, in this instance the MACD divergence failed to lead to a reversal and the downward movement in yield actually accelerated (This also shows my point above regarding price trend taking priority over momentum). - What is also a little scary is that the period from 1999 to 2001 on the Japanese Yield chart bears an uncanny resemblance to the period on the US 10 Year Yield chart from late 2008 to the present. 
    - My third qualification comes from looking at the Weekly chart with MACD (See Bottom Chart below). On the two previous occurances of daily Bullish MACD divergence, highlighted above (1992 and 1995), the weekly Yield and MACD were also Bullishly diverging, however this is clearly not the case on the current weekly chart, where MACD continues to head lower with price.

In summary the situation is thus; the MACD indicator is posting a possible warning sign that a reversal or correction may be due, however the indicator can occasionally give a false signal, in those cases the price or yield will fall to a significant new low, this may be one of those occasions.

Posting contradictory analysis is perhaps not to helpful on the face of it, however I think it important to present arguments for and against. Knowing both sides I believe makes analysis of the market and final decision making more robust. My preferred analysis, is that US 10 year yield will continue to head lower, though a sharp correction is possible. A failure to post a sharp correction, or a correction cut short, could however see  yields not only head lower, but could see a move towards a collapse type situation. We live in  interesting times.

US 10 Year update.

Following last nights announcement by the FOMC, US 10 Year Yields have dropped to there lowest levels since early 2009 and the depths of the Financial Crisis, closing last night at just 2.75%. This may seem absurdly low to some, whilst others may argue that the Bonds are possibly heading towards bubble status, however my take, looking at the charts, leads me to think that there is still plenty of room for yields to move  lower.

The first chart below is the Weekly US 10 year yield since 2005. This shows a 'Failed Inverted Head and Shoulders' pattern formed over the past few years. The failed 'Head and Shoulders pattern' is probably a much more reliable tool than the actual 'Head and Shoulders pattern'. - The break of the low of the Right Shoulder of the pattern occurred in June and was subsequently re-tested last month, this re-test held well, and yields have since dropped by some 35bps. - Often, this pattern will see the price travel all the way to the peak or base of the head, in this case near 2%. Of course like all patterns it is fallible, however right now it appears to be following the script, and until such time as this does not seem to be happening, then I have no reason to doubt it. 

The next chart shows the US 10 year yield daily chart over the past couple of years. A major Double-Top formed over 2009/2010, this broke down back in June, a target for this is 2.20%. Additionally a strong downtrend channel, which has existed for some months now, is driving ths lower. The recent move up to 3.10% in July, was the re-test of the 'Failed Inverted Head and Shoulders' pattern break line, (as well as being the re-test of the Double-top), and a test of the upper downtrend channel line. - What is interesting here is we have a pattern, within a pattern, the Double-Top pattern sits within the Right Shoulder and the failed breakout of the 'Failed Inverted Head and Shoulders' pattern. - The past few weeks have also seen a small descending triangle, which has broken lower.  - Momentum, daily and weekly, remain supportive in my opinion. - Thus I believe that there are strong arguments, at least technically, for a further drop in US 10 year yields for now.

Bund Symmetrical Triangle. + US Yields falling as Equities Rally..

The Bund Future appears to be breaking out of a Symmetrical Triangle, this would appear to suggest strong bullish potential in the coming days and weeks (German 10 year yields much lower), the chart below shows this Triangle pattern. The breakout level is 129.21 (Note: the bund is now trading at 129.35) and the measured target for this breakout is significantly higher at 132.20. In addition the breakout is supported by a break of the falling momentum trend-line on both the RSI and MACD.

With regard to the measured target above, I cannot rule out the possibility that this could go further than the suggested measured target. A look back at the weekly Bund chart over the past 20 years shows two similar price and momentum set-ups to the current set-up. The chart below shows the current set-up on the weekly, including the price set-up and the momentum set-up.  The two subsequent charts show the previous similar set-ups, one from 1995 and the other from 2002.

Bund 'Symmetrical Triangle' set-up - Weekly 2010

Bund 'Symmetrical Triangle' set-up. - Weekly 1995.

Bund 'Symmetrical Triangle' set-up. - Weekly 2002.

 

 

With regard to the recent drop in US Treasury yields and simultaneous rally in equities. There seems to be a few commentators questioning this, they suggestthat US stocks should be dropping as yields drop, the rationale being that the drop in yields is a reflection of a weak economy, particularly given the already very low yield levels. Fundamentally I can not argue with this, though for now I continue to hold a bullish bias on equities. This bullish bias is based off my take of the technical picture, however I will add that I am only short-term bullish, and this view could change easily with a change in the technical environment. - Further to this, the following chart shows that there is nothing unusual in the SP500 rallying as US 10 year yields drop sharply. The green drop down columns show periods where US 10 year yields dropped sharply as the SP500 rose, in the past six years. If I were to second guess why this is happening, my best bet would be that the low yields are looked on as favourable for stocks, a situation that may be accentuated if the Fed initiates a QE2 programme. However I guess that if low yields do not help stimulate the economy, then US equities will eventually move lower.

As an aside, with yields moving lower, the USDJPY weakening, the stronger EURUSD and Stocks rising, it appears the correlation of Risk-on and Risk-off assets seems to be breaking down.

Happy Monday --- US stock's comment + 10 year yield chart overview

The S+P500 had a roaring week last week. The move exceeded my expectations for the bounce and slightly calls into question my more bearish stance. In particular in relation to the comparison overlay with the 2008 which I alluded to in my S+P analysis of last week (The overlay can be seen by clicking on this link). - I never look at these comparisons with expectations of exact repetition, rather I like to see a rhyming behaviour, to that extent this week should shed more light on whether or not this continues. A move over 1090/1100 will lead to me to view this overlay comparison as over, however a week of sideways action with 1070/1090 largely capping and a drift back towards lower levels towards the end of the week, will lead me to think the bearish (or even ultra-bearish scenario may still be prevalent).

FWIW two big flags were raised last weeks in terms of market calls by prominent market commentators:

1) Bob Prechter was all over the press last week calling for a dramatic drop to below 1000 in the Dow over the next few years. I followed Prechter a few years ago and quickly wished I had not. (BTW, I do not personally see how stocks can drop to the sort of levels he is talking about in a world where the monetary spigots can be turned on as opposed to the early 30's where the Gold Standard restricted the central bank's ability to help.)

2) Doug Kass called for a Major Bottom for stocks for the year. Doug Kass is a commentator who I have enormous respect for, and have followed for years. He was one of the first commentators I remember highlighting the sub-prime crisis well in advance of its onset. Also he called the major low in stocks in Mar 2009, suggesting it may be a once in a lifetime generational low. So when he talks I tend to listen. However Doug Kass like most commentators only has a partial success record, in August last year he called for a top in stocks for 2009, missing the subsequent 15% or so of gains in late 09. More significantly however is his July 2008 call where he said Stocks have bottomed for the year. His timing was nice in one sense, in that the S+P put in a decent bounce in mid-July 2008 into mid-Aug, not unlike the current bounce following his most recent comments. However from mid-Aug 08, it was down, followed by hard down in Sep/Oct 2008. Interestingly, his July 08 call, and his Jul 10 call occur at virtually the same point on the overlays. - I have shown this on the following chart (Click charts to enlarge):
Moving on the US 10 year yield: Last week, as US equities rallied, the US 10 year note sold-off, and the yield has moved back towards the 3.05% yield level. This was my line in the sand on the way down and a clear break below here triggered the sharp decline to 2.88%. I would expect 3.05% now to cap as resistance, though a minor break may see a push up to the 3.10/.11% low of the big multi-month Double Bottom low. Any moves through 3.10/.11 will call into question the more bearish view of lower US yields, which looks for a decline over the next few months to the low 2's. -- I am posting some charts below, the first chart shows the current stance of the 10 Year Yield, highlighting the big Double top at 4%, and the recent break of the 3.05/3.10%. I have have also highlighted a Bullish Divergence which occurred in recent weeks.
The next set of charts shows a comparison I have been using on the US 10 year yield. The top chart is the 2000-2003 decline in yield, the next chart shows the past few years. Both charts show a similar formation; in both cases the 10 year yield appeared to form inverted Head & Shoulders patterns, in both cases these patterns failed to follow through and reversed. -- In recent weeks we have broken below the low of the Right Shoulder of this pattern. When this occured in 2002, the price and momentum action was very similar, with bullish divergence forming. I highlight this because it shows the on-going similarity of these charts. Once again, there is no guarantee this similarity will continue, however if it does it fits in with the big Double-Top bearish view on the US 10 year yield, and I would assume this would be consistent with continued lower stocks. (CLICK ON CHARTS TO ENLARGE).

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.