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Bonds Sending More Bullish Signals, Currencies Not There Yet


There are signs of hope from the key bond market charts, however, the currency markets are still acting like a wet blanket for the bulls.

MINYANVILLE ORIGINAL As we head into the Thanksgiving holiday weekend, the market was kind enough to give everyone a reprieve from the persistent downside action we had seen since late September. Starting with Friday's intraday turnaround and continuing with Monday's follow-through day, the risk markets rallied nearly 4% off the lows.

Yesterday's and today's muted action serves as a good breather – if you ask the bulls. On the other hand, it was the first signs of the rally running out of steam if you ask the bears. I will note that typically the bears don't like to unleash their fury on the markets on light trading sessions like today and Friday. So, perhaps we see some more upside price action in stocks in the short-term.

The real trading action will resume on Monday as traders and investors will be focused on the successes and failures of Black Friday (which has now morphed into Brown Thursday and Black Friday). I will not be focused on all of that but rather on the price action in the asset classes.

Notice the chart below that shows the relative movements of the US Treasury Rates (shown by ProShares UltraShort 20+ Year Treasury (NYSEARCA:TBT)), the S&P 500 (INDEXSP:.INX) (shown by SPY (NYSEARCA:SPY)), the commodities complex (shown by PowerShares DB Com Indx Trckng Fund ETF (NYSEARCA:DBC)) and the euro currency (shown by Currency Shares Euro Trust (NYSEARCA:FXE)).

The "risk on" trade gave stocks and the euro a boost, but not enough to take out even short-term resistance levels (yet). Commodities did so on the back of tension-boosted crude oil, but by Tuesday's close, they gave back that win. Interest rates, meanwhile have been rising, but not so much that technical changes have been made.

The bottom line is that we need to see more than a two day "risk on" trade to reverse the techncial damage that has been done recently. Until that happens, the "sell the rips" mentality will remain the proper one

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Treasury Yields Held Support and Are Bouncing – a Good Sign for the Risk Bulls

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The yield on the 10-year US Treasury Note ($TNX.X) reached all the way down to important short-term support at September's lows (1.548%) last week. According to the wave count I have on the chart below, the next move for the TNX will be a run up to around 2% (wave (iii) projection).

Based on recent inter-market relationships, one would certainly think that such a move would be accompanied by a corresponding move higher in risk asset prices. Only a close below the 1.548% support level would negate this constructive (for risk assets) wave count. So, for the time being, let's label the action here as "bullish" for risk assets.

Emerging Market Debt Bulls Trying to Recapture the Flag

Emerging markets bond prices (as measured by the iShares JP Morgan Emerging Market Bond ETF (NYSEARCA:EMB)) are now hovering just above their 14-day moving average resistance line. If they can manage to hold up above that support line and then follow through a bit more in the coming days, this "tell" will join in the bullish song being sung by Treasury yields. Stay tuned…

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High Yield Bonds Showing Signs of Improvement as Well

The SPDR Lehman High Yield Bond Fund (NYSEARCA:JNK) had been flashing bearish sign after bearish sign as of last week's report. Over the last week, however, JNK has begun to show signs of repairing its chart technically.

Before those hopeful signs came about, though, we saw one more potentially bearish technical break last Wednesday. That day, JNK closed the day out a few pennies below its 100% Fibonacci price projection line at $39.69. It wasn't a significant break, but it was a closing breakdown nonetheless. On Thursday, however, we saw JNK manage to put in long-tailed bullish reversal candle. It traded lower throughout the day – breaking another support line in the process – but then it rallied at the end of the day to close out in positive territory, near the highs of the day and safely above both broken support levels.

Since then, JNK has continued higher each day and took out what might have been important resistance at $39.98 Monday. As of the close on Tuesday, JNK is still safely above that resistance level.

So, let's assume the break below the $39.69 support level was a false breakdown and that the recent pullback in JNK was therefore an "abc" correction to the downside. Only a break and convincing close belw $39.69 will prove this bullish argument incorrect. This all means that the signal coming from JNK is bullish and awaiting confirmation in the form of a breakout above its 60-day moving average at $40.21.

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Overall for Bonds:

For the first time in a while the message is more bullish than bearish. Things can and often do change, but until more bearish evidence presents itself, we have to give this bond battle to the bulls.


The Euro / US Dollar Will Head Lower – but When?

Just a quick note on the euro / US dollar currency cross (EURUSD) today – it's still setting up for more downside. The next wave lower may start anywhere from current level (around 1.281) or up at the max upside target for the recent little upside move (at 1.288 – see the bright red line on the chart).

The downside target for the next move lower is down below 1.26 (see the green line on the chart). This presents a poor reward to risk scenario for prospective euro longs. The implications of a lower euro / stronger US dollar (assuming the persistence of recent relationships) are for weak price action in risk assets – including the precious metals.

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The Japanese Are Doing Everything They Can to Devalue the Yen – Presumably to Boost Their Export Economy

In recent weeks, I've been showing how the Aussie dollar / US dollar currency cross (AUDUSD) has been trading bearishly (although not as bearishly as the EURUSD). I have intentionally left the Aussie Dollar / Japanese Yen cross out of the discussion because something seemed to be out of sync with the rest of the "risk" currencies. Today, however, I want to focus on the AUDJPY as well as the USDJPY.

The first chart below shows the AUDJPY and it is clearly a short-term bullish picture. The AUDJPY should make it the rest of the way up to its 100% Fibonacci projection line resistance at 87.578 from just under 85 currently. That is a much different picture from what we've been seeing from the AUDUSD and it tells me it has more to do with Yen weakness than Aussie strength. Let's take a look at the Yen versus the greenback to see if my theory holds up…

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The chart below shows the US dollar / Japanese yen cross on a daily basis going back to last year. Notice the very bullish short-term action here as well. To me, the two Yen charts indicate that the Japanese government is in a full court press to keep their currency cheap versus the rest of the world in an effort to boost exports.

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Are the BOJ's intervention efforts helping? It's too early to tell if it's really helping their economy, but the iShares Japan ETF (NYSEARCA:EWJ) is up around 6% in the last week – so the markets seem to like the intervention. I should insert this cautionary note on EWJ, however: it needs to conquer the $9.22 - $9.30 area (from $9.17 currently) to take out the intermediate-term downtrend line and horizontal line resistance. Until that happens, the recent upside could still be "sucker's rally".

Franc Strength vs. Krona Could Spell Trouble for Stocks

My new proprietary indicator using the relative strength of the Swiss franc versus the Swedish krona gave us a false break to the upside recently – which meant any bullish thoughts generated from the break have been stomped out.

Not only did the EURCHF / EURSEK ratio fall back below the broken downtrend line – which was bearish in and of itself – but it just set a new short-term low today. This simply implies that risk assets are not out of the woods just yet.

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Overall for Currencies:

The message for risk assets from currency land is still one of caution. Until I start seeing potential for a meaningful move higher in the euro, I will be at least partially skeptical of the longevity of any risk rally.


While there are clearly more bullish short-term messages being generated by the fixed income markets, I'm just not seeing any confirming evidence from the currency markets yet. Stocks certainly seem to agree with the happier messages from bonds, but we'll also need to see more than just a two-day blip for the technical damage that has been done reversed in any meaningful way.

Happy Thanksgiving to everyone! Travel safe!

Twitter: @tttechnalytics

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