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.
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.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.