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Longer-Dated Treasury: Stay Short Until Further Notice

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In recent patterns, rates move higher leading up to the auctions and then a minor rally in bonds ensues.

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Summary of Yesterday's Notable Technical Developments

Stocks rallied modestly yesterday on light volume and relatively muted internals. They're still range-bound and are being pulled in different directions by tech (bullish) and financials and energy (bearish)

Bonds continue to trade off in price. Short-term support came into play yesterday after the auction when the 3.5% yield held up as resistance for yields/support for prices.

Commodities
may have found a little support yesterday as gold attempted to establish a new, higher support level and oil reached extreme oversold conditions and is setting up for a bounce.

The US Dollar Index
rally paused yesterday as whatever money was still in play before the end of the year rotated back into risk assets.

Market Internals:



Critical Market Components:

S&P 500: support at 1083; resistance at 1113.69; possible target of 1139 to the upside on a breakout; rallying on light volume has us skeptical

NASDAQ: support at 2112.44; resistance at 2203.78 (2009 high); possible upside to 2231 on a breakout; NASDAQ assuming leadership recently

Dow Jones Industrials: support at 10,197.47; resistance at 10,448 on a weekly close; 9,712 is next target on the downside on any break of support; energy and financial weakness recently has weighed on the Dow

10-Year US Treasury Yield: support at 3.42%; resistance nearby at 3.5%; our intermediate-term target is the 4.1% area; bonds sold off hard initially after the auction results yesterday, but then rallied off the lows a bit to leave the 3.5% short-term resistance intact

Commodity ETF (DBC): support just below at 23.47; substantial resistance at 25; a break of 23.47 will likely mean a move down to around 22.75; commodity ETF being dragged down by the ugly action in crude oil -- the rest of the complex has pulled back, but not as bad

US Dollar Index (DXY): support is the broken downtrend line at around 75.10; resistance exists at the range of 76.43 to 76.89; our intermediate-term target is the 80 to 81 area; the DXY even on its pullback days isn't giving very much back right now

Semiconductor Index (SOX): support at the weekly uptrend line at around 320; resistance is a weekly (today) close at 338.58 (SOX currently above it); a breakout above resistance would give an upside target of 379 to 385; the SOX really trying to make the breakout happen -- if it succeeds, don't fight it

Bank Index (BKX): short-term support very nearby at 42.99; staunch resistance at 44.82; next support on a breakdown at 41.62; the banks are stuck in a trading range after breaking their uptrend line that began in March

Crude Oil: short-term support at yesterday's low at 69.81; resistance is now 74; "line in the sand" support at 66.06 if the short-term support breaks; oil has been the weakest link in commodity-land recently -- the hot money has moved to gold for the time being

Gold: short-term support is Tuesday's low at 1120.90; short-term resistance is Monday's high/close at 1164; our target entry back into gold is the uptrend line at around 1100; gold has so much bullish interest right now that pullbacks are sharp but shallow

Chart of the Day: The Yield on the 10-Year US Treasury note


Click to enlarge

  • The action in Treasuries (the 10-year is shown in the attached chart) this week has been very volatile -- this is normal during "auction weeks".

  • Readers know that I've been bearish on bond prices for a while now. This week's action has done nothing to change my opinion. In fact, the market appears to be having trouble digesting all of the new supply.

  • The yield curve (from 2-year maturities to 30-year maturities) is the highest it's been since 1980. A reversion to the mean in the spread between "twos" and "thirties" would require that short-rates move up (i.e. the Fed really starts to fight inflation expectations with rate hikes) or long rates come back down. Investing for 30 years at 4.49% even as inflation looms just doesn't seem that enticing.

  • Watch the action in longer-dated Treasuries closely these next couple of days. The recent pattern has been for rates to move higher leading up to the auctions and then a minor rally in bonds ensues. This makes for easier digestion of the new supply. If bonds don't rally today or Monday, it may be a sign of market indigestion. This could lead to the higher rates that my firm, ThirdWave, has been forecasting. Our intermediate-term target for 10-year yields is at 4.12%, substantially higher than current levels (around 3.5%).


Strategy: Stay short of longer-dated Treasury and investment-grade debt until further notice.

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No positions in stocks mentioned.

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