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Evaluating True Upside With Currency Markets Bullish and Bonds Bearish

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Currency markets are saying, "I think I can" while the bond markets are casting some reasonable doubts as to the staying power of this rally in the short-term. Here's how to measure potential.

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BONDS

The daily chart of the yield on the 10-year US Treasury Note ($TNX.X) is shown below. As I mentioned last week, I thought that TNX would run into some short-term resistance at around 1.825%. Well, during last week's trading, TNX actually hit and surpassed that resistance level for a day or so. Now, however, yields are back down below resistance and may be setting up for a short-term correction to the downside.

My ultimate target for the bigger picture correction is still at around the 1.949% level on the 10-year T-Note. However, before we see yields go up there, we'll likely see a give back of some of the recent upside. Such a move lower in rates would probably be wave "b" of an "abc" correction higher. If you're short of bond prices right now, get ready for a little give back of some of your recent gains. If you're not yet short of bonds, I for one would be waiting for a pullback to around the 1.48% level in rates to enter my trades (likely using TBT for that one).

If you're thinking of going long of bonds (in terms of price), you can do so. I would caution you to not overstay your welcome once the downside target in yields is approached as I'm expecting another sharp short-term rise in rates once wave "b" plays out.


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Emerging Markets Bonds are "0 for 2" in terms of holding support in the short-term.

The iShares JPMorgan US Dollar Emerging Market Bond ETF (EMB) has been featured here several times over the recent months, mostly because of how bullish it was trading. It had been either holding support at the 14-day moving average or at its intermediate-term uptrend line – or both. Now, however, EMB has broken down below the moving average support and the uptrend line support.

The only hope the bulls have right now is that this is just a correction lower. If that's the case, then the "correction" support at the 100% Fibonacci price projection line should hold up at 116.90. That's not much of a move lower from Friday's close of $117.74. Even if you're not scared off by the likely move lower to that support level, you probably will be scared of the downside move that will occur if that support level breaks. Watch that carefully if you're involved with this trade.


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OVERALL

If you couple these slightly bearish developments in EMB with the likelihood of a short-term decline in the US Treasury Note yield, the message from the bond markets seems to be one of caution for risk bulls. That is a little bit in contrast to the hopeful signs coming from the currency markets. Remember, though, that several of those currency messages are: "There's room to go higher if xyz technical target is taken out." Obviously, a lot will hinge on whether we see more upside in the euro and downside in the US dollar.

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



All of the yields came down week over week in the key European sovereign markets I follow here. That seems to be good news for European stocks which have been rallying. However, why are we not seeing more of a rally in the EURUSD? Just asking...

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

Twitter: @tttechnalytics

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No positions in stocks mentioned.

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