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Wednesday, 9 November 2011

Italian Bonds over 7%

I was talking about the possibility yesterday that we could see a major bearish reversal, and we may be looking at that starting now, though a visit to 1185/90 support on ES doesn't become a likelihood until the ES rising channel support at 1240 is broken, and that's holding on the first test so far.

How serious is this move overnight? Potentially very serious indeed. It has been triggered by Italian bond yields moving over 7% and that has been triggered in part by some vey stupid moves by European leaders. Firstly banks in the Eurozone are being very strongly encouraged to mark their weak sovereign debt to market, which means that a lot of them are just reducing or selling out their holdings altogether. Margins on weak debt have also been raised and all this selling has taken italian debt over the important 7% level. Over 7% the debt becomes harder to roll over and Italy is on a slide towards default that may not be easy to reverse. Greece is a small two bit economy that has been a major struggle to rescue. Italy is much bigger and owes an awful lot of money.

On ES, as I mentioned, rising channel support at 1240 has been tested overnight. If that breaks down then more downside will look very likely, though we might well see a strong bounce back into the channel. As I mentioned yesterday morning, the integrity of this rising channel gives us a clear bull/bear dividing line:
Looking at the USD currency pairs the picture is looking grim for the risk-on trade. EURUSD has broken channel support and may well be starting a big new wave down. Obviously the potential H&S forming on EURUSD also rather springs to the eye:
GBPUSD, which I've been using as a proxy for the anti-USD risk-on trade as EURUSD has been much weaker, has broken the rising channel. That is very unambiguously bearish:
30yr Treasury futures (ZB) broke short term declining resistance and are trading back over 142. I have another declining resistance trendline above and if that breaks then ZB may well be breaking up in a serious way:
The main reason I was talking yesterday about the potential for a major bearish reversal here is the Vix though. There the break below 30 yesterday was bullish, but you can see that the potential right shoulder bottom on the possible IHS forming there is only slightly lower than the left shoulder. If that IHS was to play out it would take Vix to new highs which would suggest new lows on equities below the October lows:
I'm now leaning towards seeing the ES rising channel break down soon, and I've been looking at the interesting setup on EEM for some indication of how that might play out. Obviously I've posted the potential huge H&S forming on the EEM daily chart before:
There is a bullish alternative, and that's the IHS forming on the 60min chart. For that to continue forming however, symmetry would suggest a break down towards 39 area support to make the right shoulder, and that would be roughly equivalent to a test of the important 1185/90 support level on ES. I'm watching to see whether the current rising channel on EEM breaks down at the open:
We're seeing a bounce at 1240 ES channel support so far, as expected, but it's hard to say how far it will go. It's possible that this is just a bear flag in the process of forming. A break back above 1253 would look cautiously bullish for today. The technical damage on EURUSD and GBPUSD however is arguing that the rising channel on ES may well break soon regardless. Kudos once again to my EW friend Alphahorn for calling the high yesterday and he's obviously still looking for much more downside here.

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