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Risk On! Risk On! Bond and Currency Charts Are Not All in Agreement, Though


Are key bond and currency charts telling us to get involved on the long side without any cares? Not quite yet.

MINYANVILLE ORIGINAL So, last night at 11 o'clock or so, I was watching as the votes were counted electronically on the floor of the House of Representatives. I think most of us breathed a sigh of relief (at least for the short-term) even as many of us were distressed about the lack of substance in the deal that was made. I knew we would see a "risk on" day even as I watched last night. The question was / is, "Will it last for more than a day or two?"

I noted in the reports I sent out last week and Monday to subscribers of the Sea Change Report that the key of any rally that might occur will be to study the market internals right along with the actual price levels of the various indices and markets. That advice has not changed. For my part, I'm giving you some key levels to watch carefully into today's close.

Now onto the charts.


Treasury yields are reflecting "risk on" trade, but are at a crossroads for the short-term.

The yield on the 10-year US Treasury Note (INDEXCBOE:TNX) (shown in the two charts below) was a good guide for everyone over the last few weeks. Despite all of the convulsing in either direction by stocks and commodities, Treasury yields never really gave me the impression that the risk markets were in big trouble. Treasury yields did pull back, but they easily held key support before Monday's rally.

Now yields have shot back to the upside. However, TNX is running right into key short-term resistance at 1.847%. This obstacle is created by the horizontal line of resistance that has existed since last May (see the yellow boxes on the charts). There are two potential scenarios I want to lay out – one is very bullish for risk assets in the short-term and one is less so (although I would not call it bearish).

The first chart below shows the TNX completing a wave "(((v))) & ((i))" this morning. That would make sense due to the horizontal line resistance mentioned above and because wave (((v))) would then roughly match wave (((i))) in magnitude. This scenario would have a mild pullback in rates (and likely risk assets) commencing very soon and at or very near current levels. The pullback in rates would have probably downside targets of 1.744% and 1.7%. Such a pullback in rates would probably be accompanied or caused by a corresponding pullback in stock and commodity prices. The good news for the bulls is that even in this less bullish scenario, there will be more upside ahead once the pullback is over.

The minimum intermediate-term to long-term rate target for the TNX is 2.031% and it could be all the way up to 2.21% or even 2.321% under this scenario. Clearly, even the lowest of the three potential targets being hit would mean happy days for owners of all types of risk assets.

Click to enlarge

The second, more bullish scenario for the risk bulls is that the TNX completed wave ((i)) on December 19 and wave ((ii)) last week and that what we are seeing right now is the early stages of wave ((iii)) higher. In this case, no short-term pullback should be expected and the yield on the 10-year should instead be expected to continue to run to at least the 2.044% level and maybe up to the 2.103% level before wave ((iii)) ends. This scenario would still have the 2.21% to 2.321% longer-term targets on the upside, but would eliminate the 2.031% level as a consideration. To me, if 1.847% is taken out on the upside, this more bullish scenario will be the one that is likely playing out.

Click to enlarge

Overall for bonds:

The message here is that we can feel better about the intermediate-term for risk assets, but we need to monitor the TNX closely at current levels to see if it decides to pullback to 1.744% or blow right through this resistance in the more bullish scenario. I write "we need to" monitor this closely because the bond market is bigger and involves bigger players than the stock market. The action there tends to be more "true" than in stocks (even with the outside intervention of the Fed). What happens with bond yields will be very helpful in either giving us the green light in terms of taking on risk assets or giving us the short-term "be patient" signal.
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