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Despite Euro, Global Influences Are Bullish


The euro continues to reflect the zone's problems, while the global central bankers' efforts to reinflate the balloon have risk assets on the rise.

Typically, when I sit down to prepare this report for the 'Ville, I look for a central theme to be presented to me by the charts / markets.

Today was interesting in that I can identify multiple themes being thrown at me all at once. I'm seeing evidence that the US is doing fairly well in terms of the economy plodding along (in a forward direction), with the corporate constituents sporting nice, clean balance sheets.

I'm also seeing evidence that the Federal Open Market Committee's announcements last week have had the effect of pushing interest rates lower (as was the FOMC's goal) and giving global players a reason to push up on all things "risk."

The final theme that pops out is that the problems in Europe appear to want to go on for the foreseeable future – but that those problems, while certainly being acknowledged, are being pushed aside by the more bullish global influences.


10-Year T-Note Update

  • The weekly chart of the 10-year US Treasury Note Yield (^TNX) is shown above. As I've highlighted here repeatedly over the last weeks and months, I feel Treasury rates are headed lower.
  • The 138.2% Fibonacci price projection line for the TNX (for wave 3) comes in at 1.496% -- which still offers a nice bullish short-term bond trade opportunity.
  • Third waves typically finish up at the 138.2% or 161.8% Fibonacci price projection lines, so if 1.496% doesn't hold up as support, the next support would come in at 1.115%.
  • In the past year or so, I would have had a clear idea of what would be going on with the risk markets if rates were to move lower like they are currently and likely will be in the near-term. However, by the action in equities and certain commodities recently, we may be getting to the point where the "asset allocation" effect comes into play.
  • What I mean by that is that money managers may be "forced" to move money out of bonds and into other asset classes / investments so they can have a realistic chance of meeting their required rates of return (for pensions, treasury funds, high net worth accounts, etc.).
  • I have to assume based on the action (stocks and commodities moving higher despite the systemic concerns in Europe and the supposed growth concerns in China) that the "asset allocation" effect is going on right now.
The longer-end of the yield curve is painting a similar picture.

  • The weekly chart of the 30-Year US Treasury Bond Yield (^TYX) is shown above. It appears to me that the TYX is in the early stages of a fifth wave (what would be wave v of 3) move lower that will take it down to the 161.8% Fibonacci price projection line at 2.54%.
  • From there, we should see an upside correction (wave 4). Based on the fact that wave 2 was a fairly substantial upside correction off of the wave 1 low, I would anticipate more of a "flat" correction for wave 4.
  • There should be more downside in rates to follow – which is pretty amazing. However, every time I start thinking about how amazing and unfathomable these rates are, I just have to look at Japan and I drop that whole line of thinking.
Emerging markets bonds are looking bullish as well – witness the iShares Morgan Stanley Emerging Markets Bond ETF.

  • Perhaps as a reflection of the reflationary environment we're in, anything relating to emerging markets appears to be on the rise. The fixed income securities of those markets are no exception.
  • The chart above shows the iShares Morgan Stanley Emerging Markets Bond ETF (EMB) on a weekly basis going back to 2010.
  • The EMB appears to be in wave (iii) of iii of new primary wave higher. The minimum upside target – assuming I'm on target with my wave count – will be 113.10. As I mentioned before, third waves typically finish up at the 138.2% or 161.8% Fibonacci price projections, so there could be even more upside above 113.10 for this wave.
  • The bottom line is that the powers-that-be are getting what they want from all of their pump priming.
The junk bond market still looks to have a bit more upside left before this run is over.

  • More evidence that the risk trade has some more room to go on the upside before this move is over can be found in the chart of the iShares Barclay's High Yield Bond ETF (JNK).
  • Even if we assume that the JNK is merely correcting higher, the upside target would come in at 40.60 (the 100% Fibonacci price projection line). That gives JNK longs another 5% or so to the upside at a minimum.
  • On the other hand, if all of this upside we've seen is part of a new primary wave higher for JNK (and for risk assets in general), then the upside for JNK will be significantly higher than 40.60. Either way, it appears JNK remains a nice one to hold onto for now (and that's not even taking into account the 7% + yield that it pays).

The euro / US dollar currency cross may have peaked in the short-term.

  • The chart above of the euro / US dollar currency cross (EURUSD) shows an "abc" correction terminating last week (see bright red labeling).
  • The EURUSD backed off fairly hard once the 100% Fibonacci price projection line at 1.3228 was tested. Unless and until that resistance is conquered, I have to assume that a new primary down move is under way.
  • The darker red labels show what may be the beginnings of the new down move. The EURUSD appears to be in wave (ii) of iii of the new primary wave lower. The resistance that cannot be broken for this wave count to be valid is 1.32134. As I type this, the EURUSD is trading very close to that level at 1.32 – so we'll see soon enough whether this count is accurate.
  • If it is accurate, the minimum downside target for the next shot lower will be 1.29957. Right now, however, it appears that the shorts are fairly nervous about being squeezed to kingdom come, so I don't have a huge amount of conviction on this wave count being spot on.
The euro / Japanese yen appears to have peaked as well – and is trading far worse than the EURUSD.

  • Meanwhile, the euro / US yen cross (EURJPY) appears to have also completed an "abc" correction last week and has begun to move lower in what should be a new primary wave to the downside.
  • It's basically the same set up as the EURUSD, but the line in the sand resistance for the EURJPY comes in at 100.712. A close above that would indicate to me that a run up to last week's highs is likely to occur. Past that, I'm not willing to prognosticate.
The Aussie dollar / Japanese yen cross (the new gauge for global risk appetite) points to more upside.

  • The Aussie dollar / Japanese yen currency cross (AUDJPY) is telling me a similar story as the JNK and EMB funds mentioned earlier – that more upside is likely for risk assets in the short term.
  • The AUDJPY has a minimum upside target of 84.071 even if this move is just a corrective move to the upside. Of course, we could actually be in the early stages of a new bull phase – in which case the 84.071 level will be taken out easily and much higher prices lay ahead.
  • Regardless, AUDJPY longs should hold on and enjoy the ride. Those not yet long can look to enter on dips.
Overall, it is hard to be overly bearish on risk assets right now. Obviously, Europe remains a concern – as is reflected in the charts of EURUSD and EURJPY. However, those problems appear to be overshadowed in the short term by central banker pump-priming and a fairly healthy environment here in the US (in terms of corporate balance sheets, growth prospects, etc.) and in the emerging markets.

As the key target levels are approached (upside targets for the S&P 500 (1,340 – 1,360), JNK, EMB, AUDJPY), it will require a new look at how things are trading. However, for now, don't be too aggressive on the short side of risk!

Twitter: @tttechnalytics

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