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Messages From Bonds and Currencies Boosting Bulls' Hopes


Consider changing from a "sell the rips" mentality to a "buy the dips" mentality.

MINYANVILLE ORIGINAL There are certainly some bullish pieces of evidence popping up as I scan the fixed income and currency charts. However, some of those are short-term signals – several of the intermediate to long-term outlooks for our major risk tells are pointing to more downside for risk assets. Things can and do change on a daily basis, so as more evidence is presented on the bullish side of the ledger, I have to consider changing from a "sell the rips" mentality to a "buy the dips" mentality. Let's take a look at what I'm seeing.


Short-term bullish / intermediate-term bearish: Treasury yields still have room to move higher in the short-term.

I've been calling for a wave "c of iv" move higher in Treasury yields (represented below by the 10-year Treasury Note Yield) for a while now. With the Fed at the controls and hell-bent on keeping rates low, the move higher in yields has been slow to occur. Finally, however, I am seeing what may be the meat of wave "c" taking place. The upside resistance for this move should be all the way up at 2.031%. Based on recent intermarket relationships, the only way I can see rates moving that high is if we see even more upside in risk assets, which would go against some of the more bearish evidence we've seen in other charts recently.

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Bullish for risk: Emerging markets debt has taken back off to the upside.

There really isn't that much new to report here except to note that emerging market debt (as represented by the iShares Morgan Stanley Emerging Market Debt ETF (NYSEARCA:EMB) below) has accelerated higher off of the 14-day moving average line support (today notwithstanding). As long as EMB stays above that line, things cannot be all that bad in risk land.

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Bullish for risk: High yield debt conquering short-term correction resistance.

Recently, I have written that the SPDR Lehman High Yield Bond ETF (NYSEARCA:JNK) has been a bearish tell for risk assets. This was based on the recent breaks of the uptrend lines for JNK's price and its RSI. However, I did note in one of my more recent reports that I would have expected to see a confirmation / continuation on the downside – and that we just weren't seeing that. Well, JNK has gone even further over to the bullish side of the fence by breaking and closing above the "correction resistance" at $40.49 over the last couple of sessions. So for now, we have to take a point away from the bears and give it to the bulls.

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Bearish for risk: Euro / US dollar cross running right into resistance.

I type, "Bearish for risk…" with one foot out the door there as well. If EURUSD manages to break and close above the 1.31426 level, the bulls will have won another battle. Until that happens, the bears have the upper hand in this skirmish.

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Short-term bullish for risk: Aussie dollar crosses have moved right up to and above short-term "correction" resistance levels; bigger picture still not overly bullish.

The Aussie dollar / US dollar currency cross (AUDUSD) closed yesterday just above the "correction" resistance level (for the "abc" short-term upside correction – bright red on the chart) at 1.03754. I would like to see one more close above yesterday's close (1.03810) to seal the deal for the bulls in the very short-term.

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The Aussie dollar / Japanese yen cross (AUDJPY) has already convincingly closed above its correction resistance at 81.616. I am not yet ready to scrap the bigger picture wave count that I've had for AUDJPY, but this development has that count on double-secret probation. Score another skirmish win for the bulls.

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Short-term bullish / intermediate to long-term bearish for risk: US dollar may have short-term downside, but a sharp rise may be coming sooner than later.

The chart of the US Dollar Index is shown below on a monthly basis going back to 2005. Based on the mix between the longer-term wave count and the DXY's current position on the chart, it looks like the greenback could drop a bit further before critical support comes into play – good for the bulls in the short-term. However, the macro picture still appears to be bullish. As long as 78.10 holds as support on the DXY, the wave count on the chart – which has the DXY in wave ii (lower) of 3 (higher) – remains valid. If that count is valid, the DXY should work its way up to the wave iii target at 86.39 over the next handful of months. That would not be great for equities and other risk assets based on recent relationships. The key in the short-term will be to closely monitor how the DXY reacts if and when the 78.10 support is tested.

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With the bullish tone coming from the bond markets and the somewhat improving picture (at least in the short-term) from the currency markets – and the bullish technical posture of the equity indices – it is hard to be too bearish on risk assets in the short-term.

There are some worrisome signs within some of the assets classes (i.e., recent weakness in Apple (NASDAQ:AAPL), IBM (NYSE:IBM), Amazon (NASDAQ:AMZN), and now Google (NASDAQ:GOOG) in equities; macro bearish outlooks in currencies; macro bearish picture in Treasuries; and mixed messages in commodities – although they are lagging, not leading indicators). The aggregate message from all of those worrisome signs has me somewhat lukewarm on the current rally.

That being noted, I choose not to fight the tape too much -- so stay long of risk in the short-term with a watchful eye out for further deterioration in market leaders and / or bearish divergences from the key currency / bond indicators I share with you each week.

Twitter: @tttechnalytics

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