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Wednesday 5 June 2013

The Big Picture on Bonds

I'm going to be taking a careful look at bonds today but first I'll look at the position on SPX after yesterday's retest of broken triangle support.

On the SPX daily chart we saw a bounce to test the daily middle bollinger band and then a reversal to retest the broken rising wedge resistance trendline from 2011 that has been holding as support this week. It's worth noting that yesterday's low was only four points above the daily lower bollinger band so I'm counting that as a technical hit and we could well see a bounce from that hit of a key technical support level. SPX daily chart:
On the seven month SPX 60min chart of the broadening ascending wedge from November there is currently a falling wedge in play from the high. If we see a break below this week's low at 1622.72 then I'd expect a fast move to test broadening wedge support in the 1595 area. Otherwise we could see that falling wedge break up. SPX 60min chart:
Looking at the SPX 15min chart the high yesterday was a retest of broken triangle support, but it has also set up a possible double-bottom. On a break with any confidence below 1622.72 I'd expect a move to test the 1595 area, but if we see a bounce today and then a break above both yesterday's high at 1646.53 and declining resistance from the high in the same area then I would have a double-bottom target in the 1670 area and we could well then see a test of the highs. SPX 15min chart:
Which of these two scenarios will win out today? We'll have to see, but the pattern setups on Dow and TRAN have me leaning towards a downside resolution.

On forex I still can't see any obvious sign of reversal back down on GBPUSD, but EURUSD is showing marked negative divergence on the 4hr chart and has formed a rising wedge from the last low, so we may see that reversal soon. On CL I have a rough IHS and I'm watching to see whether CL can break over declining resistance in the 94.5 area. If we see that I have an IHS target just over 96 and we may well see a retest of the recent highs.

On to bonds, where I want to explain in more detail what I am seeing there. I posted a chart in March with a forecast path for TLT over the next few months, and apart from an overshoot on the upside in April TLT has since followed my forecast path pretty closely so far. Here's the updated version of that TLT daily chart:
When I posted that chart I promised a detailed post to follow to explain where I think the bond market is in the big picture and this is that post. Looking closer at the TLT chart TLT has now hit for the fourth time the falling wedge support trendline on the first chart and that pattern still needs to be borne in mind, though the April overshoot may have been that pattern breaking up and failing to make target. In the event however that the overshoot was a bearish wedge overthrow before a break downwards, I should mention that the wedge target would be in the 97% area, though with only a 30% chance of making that target. My main target on a break down from here would be the very strong established support level and possible H&S neckline in the 106.5 area. TLT daily chart:
Why have I been looking for a large H&S to form on TLT? Well that's because of the longer term treasury charts. Last summer I posted the amazing 27yr declining channel on TYX (30yr Treasury Yields). That channel is now an amazing 28yr channel of course. I have left the text on that chart unchanged from my comments then, and you can see that I was looking at the possibility that the second low of a major double-bottom had just been made, with the suggestion that if that was the case, then we would most likely see TYX move back towards a possible IHS neckline in the 35 (3.5%) area. TYX closed just under 33 yesterday, so that move has now largely taken place. The TLT H&S that I have been considering is of course the mirror image of this pattern on TYX. TYX monthly chart:
Why was I looking at that possible double-bottom forming on the TYX chart? The reason was that obviously the 2008 low was major support, but I was also watching major levels being hit on the TNX (10yr Treasury Yield) and USB (10yr Treasuries) charts. I'll show that on the LOG scale USB monthly chart below and you can see that a rising wedge has been forming there since 1987.USB hit wedge resistance at the same time that TYX tested the 2008 low, and there was an obvious reversal level there. You can see the same possible H&S forming on USB as on TLT, and so I'm looking for a move to the possible H&S neckline in the 135 area. The next major trendline target on USB is wedge support in the 125 area of course and if an H&S doesn't form then that would be the next obvious target after 135. If that rising wedge breaks down then that would suggest that the long bull market on bonds since 1981 is over, though I'd be waiting for a break up from the 28yr declining channel on TYX for final confirmation. USB monthly (LOG) chart:
ES has been testing yesterday's lows overnight and they've held so far. The key levels on SPX are the 1622 low and yesterday's high at 1646. A conviction break of either should be respected.

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