Bonds and Currencies Sending Bullish Messages
The recent move higher in yields on longer-dated Treasuries has all the signs of being a game changer.
BONDS – A WHOLE NEW BALL GAME!
10-Year Treasury Note Yields Have Broken Out Above Long-Term "Correction Resistance"
For months and months I have been calling for a continued upside correction up to around the 2.28% - 2.35% range on the 10-year Treasury Note Yield. Well, that "correction resistance" range was sliced through like a hot knife through butter over the last week or so. Barring an unforeseen downside reversal in yields, we will have to label the upside breakout as a potential change in long-term trend. That would simply mean that the new trend in investment grade and higher bond prices will be to the downside and that rallies (in price) are to be sold into. What it also likely means is a good amount of new money flowing to other assets – mostly into stocks (in my opinion).
Strong Recent Action in the Greenback Leading It Right Into a Test of Resistance
The US dollar futures (@DX) is still correcting to the upside on the 60-minute chart above. Once 83.47 is tested, I expect a move lower in the greenback futures – likely a result of some anticipated short-term upside in both the euro and the Yen. We could see a move in the DX to the 79 – 80 range as the euro and yen correct higher.
The Yen Still Appears Like It Wants to Correct Higher
The Japanese yen futures (@JY) are shown on the chart above (daily mode). I have been saying – and my outlook remains unchanged at this point – that the yen is going through an "abc" correction to the upside. It looks to me like waves "a" and "b" have run their course and that wave "c" should now be commencing. The upside target for this up move should be 1.1046 (from 1.0233 currently and from key support at 1.0136 support).
Euro Weakness (After a Short-Term Bounce) Should Continue
Euro futures (@EC) are still sporting the dreaded "head & shoulders" topping pattern and are showing no signs (thus far) of attempting to negate that formation. At this point, the euro is sporting an oversold Williams %R indicator – so a corrective bounce should occur at some point soon. If I were looking to sell or short the euro, I would wait for the %R indicator to be at or near an overbought reading instead of where it is now. Make no mistake about it though, this is a clear "sell the rips" chart!
After Technical Breakdown, Aussie Dollar Extremely Oversold and Due for a Bounce
Moving on to our other risk currencies now, the Aussie dollar futures (@AD) are shown above. The Aussie currency broke down in ugly fashion a few months ago. The action since that breakdown has been even uglier, though. Now, the Aussie is very oversold on both the %R and RSI indicators and is trading right at horizontal line support. That being noted, I would be expecting a short-term corrective rally in the Aussie currency – possibly up to one of the four resistance lines on the chart. Note on the chart that I used red dashed lines for the 38.2% and 61.8% retracement levels – indicating that I view those two as higher probability resistance levels than the other two.
Canadian Dollar Appears to Still Have More Downside Ahead of It
The Canadian dollar futures (@CD) are not nearly as oversold as the Aussie Dollar (likely due to Australia's heavier dealings with China), but the chart is quite bearish nonetheless. While CD isn't quite as overdue for a bounce as AD, a bounce is certainly possible, if not likely. The Canadian dollar appears to me to be in the latter stages of a macro "ABC" downside correction with an approximate target of 0.9324 (from0.9518 currently). So, a little bounce in CD to the 0.9625 to 0.9681 range would appear to be sellable in anticipation of the remainder of the downside move.
SUMMARY OF TODAY'S FINDINGS
Overall I am looking for some continued upside in stocks (and perhaps crude oil) along with some short-term strength in the risk currencies and Treasury yields. That should be followed by downside correction / consolidation in equities – which should be yet another good long-side entry point. My advice is to start getting used to buying into downside corrections more and to de-emphasize efforts to pick tops in the market. If this opinion changes, you all will be the first to know!
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