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Message of the Markets: We're Just About Where the Bulls Want Us to Be

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Risk assets appear to be on the brink of a monthly breakout. Tomorrow's close will be critical.

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For the past several weeks, I've been harping on the fact that even as stocks progressed higher and even as the euro currency crosses were seeing bullish action, the "non-headline" currency crosses of the Aussie dollar / Japanese yen (AUDJPY) and Canadian dollar / Japanese yen (CADJPY) were not confirming the bullish action. Nor, I pointed out, were the Treasury markets.

Well, with some strong performances tomorrow, the AUDJPY and CADJPY can take out two of those three bearish arguments. Only the heavily manipulated Treasury market will stand alone as sending "bearish" messages (although I think all messages being sent by the Treasury markets have to be discounted due to the Fed's involvement there).

MESSAGE OF THE MARKETS

February 28, 2012

As we approach the end of the month (which actually falls on Wednesday the 29th this year), major technical levels are coming into play for the S&P and the "stuff-related currencies."

As mentioned here last week, we've already seen the Nasdaq and the major euro currency crosses break out, but the bears have tried to rationalize those as not telling the real story. The Nasdaq's detractors are saying that the only reason for the breakout there is because of the amazing run in Apple (AAPL) shares. The euro's detractors are saying that it's only because of a massive short position and the crazy weakness in the yen that we've seen the breakouts in the EURUSD and EURJPY.

Well, if the S&P, the AUDJPY and the CADJPY score monthly breakouts of their own, the bearish side will no longer be the "intelligent" side of the argument. We shall see…

BONDS

10-Year Yields have been falling again – even as equities remain buoyant.

Summary of last week's observations:
  • The 10-Year Treasury Note Yield ($TNX.X) remained below resistance of 2.08%.
  • The ultimate downside target for the TNX remained 1.443%.
Here's what the 10-Year T-Note Yield is doing now:


Click to enlarge

I mentioned last week that the TNX had yet to confirm the breakouts that we were seeing in certain risk assets (i.e., Nasdaq, EURJPY and EURUSD).

Now, not only have yields not broken above resistance, they have started to actually decline and move further away from even testing that resistance (at 2.08%).

Now, we must watch the 1.9% level – which represents the 100% Fibonacci price projection line for the short-term pattern – to see if it holds up. I'm not anticipating that it will, but if it does, yields could still shoot higher.

If, on the other hand, the yield breaks the 1.9% support, my call that rates are headed down to below the 1.5% level remains intact. The Fed is clearly steering the boat on this one as risk assets have been rising consistently (which would / should draw money out of the safest instruments).

The iShares High Yield Bond ETF (JNK) continues to press higher.

Summary of last week's observations:
  • JNK had provided a mild bearish divergence by trading lower week over week.
  • JNK was trying to hold onto its uptrend line and maintain a bullish posture.
  • Despite the bearish action, I remained somewhat bullish as JNK still had higher target prices ($39.19 being the first resistance).
Here's what JNK is looking like now:


Click to enlarge

JNK spent the last week working its way higher. The first resistance it should face will be the wave v & 3 peak at around $40.40.

From there, it should consolidate a bit before making another push higher to the wave c target at $41.62.

If this is something more than a correction higher, that wave c target should be conquered rather easily – so let's watch the action carefully as JNK approaches that level.

Right now, nothing about the action in JNK scares me or gives me pause. It will need to take out the wave c resistance, however, to provide a truly bullish signal.

Emerging markets bonds are acting great.

Here's a look at the iShares Emerging Markets ETF (EMB) as of 10:11 a.m. Tuesday:


Click to enlarge

The emerging market bond arena is another very good guage of risk appetite. The weekly chart above of EMB paints a picture of bullishness.

What I'm seeing is that the EMB has a bit more room to go as it completes wave (iii) to the upside. A brief consolidation phase should follow that. It would be that consolidation phase that I would use to accumulate EMB shares as the minimum upside target for the remainder of wave 5 on the chart is up toward 130 (roughly 15% higher from current levels).

The overall message being sent by EMB is bullish for risk assets. If JNK can get its act in gear and take out its "correction" resistance, the bulls will have plenty of ammunition coming from the bond markets, despite the "externally influenced" low yields in the Treasury markets.

CURRENCIES

The Aussie dollar / Japanese yen has pulled back a bit since last week. No harm, no foul – yet.

Summary of last week's observations of the currency markets:
  • The EURJPY and EURUSD had already broken above "correction" resistance levels. They now have a chance to close the month out above those levels – opening up even more upside for the euro.
  • The AUDJPY and the CADJPY however, had NOT broken out above their "correction" resistance levels as of last week.
Here's what the Aussie / yen cross looks like now:


Click to enlarge

Well, the Aussie / yen cross (AUDJPY) made it all the way to its "correction" resistance level at the 100% Fibonacci price projection line.

It actually peaked above that line (at 86.787) on a daily closing basis but then quickly traded back below it the next day. I will want to see the AUDJPY close the month out (Wednesday at 5:00 p.m. EST) above that level to confirm that an upside breakout has occurred.

We're right there, though, so it's tough to be overly bearish right here.

The story in the Canadian dollar /Japanese yen cross is almost identical to the AUDJPY.

Here's what the Canadian dollar / Japanese yen looks like now:



Click to enlarge

The Canadian dollar / Japanese yen currency cross (CADJPY) is also threatening to break out above its key "correction" resistance level on a monthly basis.

The chart of CADJPY is virtually identical to that of AUDJPY. CADJPY also peaked above the key resistance level of 81.137 briefly on a daily closing basis. However, it too quickly gave back that breakout the next day.

We'll need to see CADJPY close out Wednesday (at 5:00 p.m. EST) above the 81.137 level to confirm a breakout to the upside.

Wednesday's close in multiple areas – especially in the our key currency crosses, but also in the S&P 500 (1,370.68) and the iShares Brazil ETF (EWZ) ($69.58 resistance) – must be monitored closely. If (and that's a big "if") the attempted breakout in the S&P holds and is confirmed by breakouts in the AUDJPY and CADJPY, I must force myself to go from being a skeptical participant to a bullish participant in these markets.

Strategy-wise, I will go from a mentality of looking to fade rallies to one of buying the dips at every opportunity. We may (and should) get a pullback sometime soon to digest some of the recent gains. When that occurs (assuming the breakouts hold into tomorrow's close), you can't be shy about accumulating long positions.

Twitter: @tttechnalytics

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