Bonds Still Friendly to the Bulls; Currencies Are Close, but Not Quite There Yet

By Tim Thielen  NOV 29, 2012 1:41 PM

Bulls are claiming victory in certain of our key tells, but the game isn't quite over yet.

 


MINYANVILLE ORIGINAL Since last week’s article, the bullish action in emerging market debt and domestic high yield debt has continued pretty much unabated.  Meanwhile, Treasury yields continue to hover bullishly above key support – good for the bulls as well.  And, while the action recently has been great in currency land, the key risk currencies still have to conquer key resistance levels to convince the last doubters.  Let’s go to the charts to view the evidence.

CURRENCIES

The euro has been a big tailwind for risk assets over the last couple of weeks – will it continue?

The euro / US dollar cross (EURUSD) ran right up to short-term resistance – dual resistance in fact – created by the peak on 11/26 and the 100% Fibonacci price projection line for what appears to me to be an “abc” correction on the 10-minute chart below.  Only a close above the 1.30082 to 1.30124 range will negate this rather bearish set-up and open up more upside in the short-term.


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The daily chart below gives us a bird’s eye view of where we are with the EURUSD.  Based on what I am seeing here, it looks like the most recent upside in the EURUSD was just a corrective second wave higher.  If I am correct on that point, then we should see the EURUSD commence a pretty nasty little third wave move to the downside with a target of 1.24254.  There are plenty of hurdles for the bears to clear on this trade, however – the first being support at 1.28128. 

Any close in the EURUSD above the 1.30124 level will open up more upside potential – perhaps up to the October intra-day peak at 1.31386. 


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The Aussie dollar / US dollar cross nearing key resistance after clawing its way higher since October.

The AUDUSD is running right into the upper edge of a pennant formation on the daily chart below.  There is certainly more resistance above the blue downtrend line – namely the longer-term red downtrend line.  However, the cross is clearly having to struggle to get through even the lower blue downtrend line.  A failure here (which I would be able to call if the cross closed below 1.04164) will likely lead to a test of the blue uptrend line on the chart in short order. Any closing break above the blue line resistance or below the blue line support will tell us which in which direction the next big move will take place – so pay very close attention.  A break above resistance could conceivably bring about a run to the upside with a target of around 1.10 (6500 pips from today’s levels) while a break below support would lead at least to a move down to 1.00 (around 3500 pips from the breakdown point – should it occur).   Options players might do well to simply bet on a large break in either direction occurring and eliminate the need to be correct in the direction.


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BONDS

The yield on the 10-year Treasury Note is still bullishly hovering above key support.

There’s not much to add to what I have been writing about Treasury yields.  They are clearly staying low due to the intervention from the Feds.  However, they have not yet broken key support.  Unless and until 1.548% is violated on the downside (on a closing basis), the wave count shown on the chart below is still likely valid and more upside in rates should be expected.  That being noted, it’s not a perfect trade entry at current levels for those betting on higher rates occurring. 


Click to enlarge Remember where we are in the big picture in interest rates.  The monthly chart below shows just how miniscule a move up to the 1.955% to 2.473% range would be in the macro sense.  Sometimes when we see rates in the 1.548% - 1.75% range for such an extended period of time, we tend to think that such moves are out of the realm of feasibility – don't you believe it!


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High yield bonds are still pulling their weight for the bulls.

The SPDR Barclays High Yield Bond ETF (NYSEARCA:JNK) has had three bullish developments recently.  First, there was the bullish reversal candle that took place on November 16 (see the bottom green circle).  That reversal turned a very conspicuous bearish chart to a neutral chart in one session).  Next, we saw JNK close above horizontal line resistance at $39.98 on the 19 (see middle green circle).  Finally, over the last few sessions, JNK managed to close above its 60-day moving average and then proceed to put some distance between it and the average.   The second and third technical developments have turned JNK’s chart from neutral to bullish – certainly one where you’d want to be buying dips when they occur.


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Emerging markets bonds echoing the bullish action in JNK.

The iShares JP Morgan Emerging Market Debt ETF (EMB) crossed above its 14-day moving average over the last week and a half and has done a nice job of extending its gains since that breakout.  The bulls can claim victory in this short-term battle just as with the JNK chart.


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OVERALL

I am inching my way towards being more constructive on the prospects for the risk markets with the bullish messages coming from bonds.  Still, though, I would love to see real breakouts occurring in the key risk currencies as a confirmation of the positive action in stocks and bonds.  If we get the breakouts in EURUSD and AUDUSD, I will be leaving my bearish friends behind and jumping into the bulls' camp!

Twitter: @tttechnalytics

No positions in stocks mentioned.

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