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Currencies and Bonds Signaling That Friday's Rally Is Likely to See Some Follow-Through

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Once US Treasury yields test support (this week), a further rally in risk assets should commence.

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MINYANVILLE ORIGINAL In technical analysis, we look for evidence and then confirmation of that evidence – and then confirmation of the first confirmation, etc. This week, I'm seeing set-ups that could spell some relief in the short-term for the risk bulls out there. If what I'm seeing comes to fruition, we should see US bond yields rise and the euro rally fairly soon. Both moves will be corrective in nature, to be sure. However, for those either looking to trade opportunistically and for those who have been patiently waiting for a counter-trend move to re-position portfolios, such a corrective rally will absolutely be welcome.

BONDS

Rates on the 10-year Treasury nearing projected support. Will it hold?

As noted last here last Monday, the yield on the 10-year US Treasury Note ($TNX.X) broke what I thought was support at 1.56% or so. That break caused me to re-evaluate my wave count and downside targets. The new target presented here was 1.43% based on the idea that wave v & (3) would meet wave i in magnitude. For the better part of last week, yields toggled around the 1.5% level. By the end of the week, however, that psychological support level gave way and 1.43% came into the crosshairs.

With the yield on the 10-year US Treasury trading at 1.445% (as of 11:10am EDT Monday), we should be looking for the test of support to occur very shortly. Theoretically, once that support tested and holds, we should see a bounce as part of wave (4) which should take yields up to 1.976% (the 23.6% Fibonacci price retracement of wave (3)) at the very least.

The only way we see a bounce up to 1.976% based on recent intermarket relationships is if stocks and the euro are rallying. So the risk bulls out there had better hope that 1.43% is "it" in terms of near-term support.


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Emerging markets bonds performing better than emerging markets stocks.

Emerging markets bonds – represented here by the iShares JPMorgan Emerging Markets Bond ETF (EMB) – continue to give risk bulls a reason to hope. EMB has surpassed its correction resistance and the first of two potential "thrust" resistance levels and now is testing its next resistance at the 161.8% Fibonacci price projection line at 117.53. Of note as well is the fact that EMB has re-captured the previously broken uptrend line (blue line on the chart). All in all, outside of trading near an upside price projection, there's not much the bears can grasp onto with this chart.


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How well is EMB performing? Better than its cousin, the iShares MSCI Emerging Markets Equity ETF (EEM). Notice the spread ratio line of the EMB versus the EEM at the bottom of the chart below. It has been on the rise for the most part over the last several months and has really been on the rise over the last couple of weeks as EMB has held up even as EEM as faltered a bit - very impressive.


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Junk bonds confirming the bullishness of the EMB.

Meanwhile, the other risk gauge in the bond markets, the SPDR Lehman High Yield Bond ETF (JNK) has continued to hold up well even as the equity and "risk" currency markets have gone through some difficulties recently. There are any number of reasons why JNK has such a bid underneath it – bond investors seeking yield, equity investors wanting exposure to risk but with a nice yield while they wait, etc. – but the overall message here is good for the bulls.


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Now, onto currencies...

CURRENCIES

The euro and the US Dollar Index are moving off of technical levels

First, I must note that the euro / US dollar currency cross (EURUSD) moved lower than I anticipated last week. That obviously caught me off guard and had me nervous for the bulls. However, as the chart of the EURUSD below shows, a bounce has finally started. Unless we see the EURUSD break short-term support at 1.21749, we should see the cross move up to at least 1.22843 and more likely up to the mid-1.23s.


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The one thing that kept me involved in some of my bullish bets was the fact that the US Dollar Index basically met its upside price projection, but it did not violate it (unlike the EURUSD). Then when I saw the DXY reverse hard late last week and put in a bullish engulfing candle, I became even more confident that a rally in risk would occur.


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Now that the DXY has hit its target for wave v & 1, the mission becomes to identify potential downside targets for the pullback that has already started. Based on the Fibonacci retracement lines on the chart below, we can see that the range of support goes from 82.48 (the 23.6% retracement level) to 80.29 (the 61.8% retracement line). As noted earlier, this would fit in well with a bounce in the 10-year treasury yield as money would be flowing out of the safety trade and into the risk trade.


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Overall

I would have to conclude that once 1.43% is tested on the downside for the yield on the 10-year US Treasury Note, there's a good chance we see some follow up to Friday's rally in risk assets. The news flow is obviously of great importance these days, though. So do what Todd-O always advocates and use technical analysis such like this as a background for formulating your overall opinion – but never do so in a vacuum.

Before I wrap up, here's a check up on the key European sovereign debt yields:



Since last week, we've seen yields come down in Spain and Italy (good news) but rise in Portugal (bad, but nothing alarming just yet). Overall, the action over the last week has been pretty benign. That could change in a hurry, though, based on the expected news flow later this week – so stay tuned.

That's it for now! Have a great week!

Twitter: @tttechnalytics

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