Slope of Hope Blog Posts
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Bought Ultra-Short Treasury TBT Today
BEArmageddon (by Springheel Jack)
(Note from Tim: I will be putting up an important update to my 1937-1942 analog later this morning; SJ's post below paints a pretty bullish picture; my analog provides a more bearish view, although a rather muted one.}
There have been a lot of indications in recent days that the summer range on SPX was likely to break up, so it wasn't a surprise that it has, but the timing is very bad, as it has happened without the expected retracement and buying opportunity from the 1130 SPX area, and now that SPX has broken up, there is a very significant chance that SPX will break up further to a level where a retest of 1130 SPX would be the retracement target.
The IHS target on SPX is 1250 of course, and as we're taking the bull road, we are also likely to see a new low on USD, going beyond the wedge target on EURUSD in the 1.46 to 1.50 area. I'll do a broad review tomorrow of the main bull patterns, and it isn't a pretty picture from the bear side.
Here's the IHS on SPX with the two main overhead resistance levels at the Jan and May highs marked:
I've been looking at quite a few indices around the world this morning. The UK's FTSE index sprang to the eye, as there we saw a break of the neckline of an upsloping IHS a few days ago, and the neckline was retested yesterday:
Short term on SPX the rising wedge from the low has run out of road, in that the upper and lower trendlines have now crossed. The upper trendline was touched again yesterday, and has still not been broken, though the ES version saw a significant pinocchio through it. Given that the trendline is rising at over three points a day, and therefore at 60 to 70 points per month, I would not normally expect to see it break, and SPX already looks overbought on most timeframes. We shall see if it holds today:
I was looking at my indicators and my SPX:Vix wedge still has some upside ground to cover before we see another touch of the upper wedge trendline. I am hoping that this will identify the next significant swing top, though if so, I'm thinking that looks to be in the 1170 area:
The big wild card today is the Fed meeting of course, and the bears' big hope for a retracement here is that Bernanke will announce that the Fed is taking no immediate action, and that the disappointment that there will be no big QE2 will pull the market down for the rest of the week. I think that could well happen, as the argument for supporting equities has been greatly weakened by equities already breaking upwards without any formal announcement of support.
I say support of equities rather than treasuries as that is the effect, and probably also the intention, of quantitative easing. The effect is to boost equities while putting a floor under treasuries to cushion the fall that would be expected while equities rise. It is no accident that equities peaked and bonds took off in April just after the end of the last major quantitative easing push in March.
Looking again at the 30 year treasuries yield chart, the positive correlation between equities and yields, and therefore the negative correlation between equities and bonds, could not be much more obvious. If equities are to rise to new highs now, which looks very likely, then the bond rally is over, and I see overnight that 30 year treasuries are retesting the lows of recent days. Best case in the event that there is to be a significant new QE push is that bonds fall gently. If there is no QE2 at all, they look likely to fall a lot:
Chart on TLTs (by Mike Paulenoff)
Let's have a look at the pattern that continues to unfold in the iShares 20+ Year Treasury Bond ETF (TLT). Very interesting and tricky set-up in the TLTs now. Let's notice that it plunged to new lows at 100.85 for the decline off of the 8/25 high at 109.50 and in so doing has broken the Apr-Sep up trendline at 102.15 (for a second consecutive session).
While my pattern work argues that the downmove is nearing or at completion in the 101.00 area, the TLTs must reverse and climb back above the breach-point of the up-trendline — at 102.15 — to confirm that a significant corrective low has been established. Within the next couple of sessions, the TLTs had better start showing some life on the upside to confirm what my work is telling me could be a powerful upside recovery towards 106-plus.
Originally published on MPTrader.com.
Opex Chop (by Springheel Jack)
It was a very strange day yesterday with big moves on rumors that the Fed is likely to start large scale quantitative easing again. The effect was a big fall on USD and a rise on equities that hasn't been sustained so far. We did get the exact hit on the neckline of the big SPX IHS that I've been waiting for:
I was expecting a bit of a retracement yesterday and it looks as though we may well get it today instead. Dow and SPX have now broken their support trendlines and we appear to be in a topping phase that will probably last until opex. I'm expecting us to chop around in the 1100 – 1130 SPX area until the end of the week at least.
There were a number of bullish developments yesterday on a number of markets. One that caught my eye was emerging markets, where the April high was exceeded slightly. I've posted the EEM chart before to show how it tends to bottom before SPX as a lead indicator. Here's the daily futures chart to show where we are now, with a rising wedge top trendline hit as well as April resistance, and a retracement towards the lower trendline that has already started:
That illustrates one of the numerous reasons why yesterday's high is such a strong resistance area for equities. We are likely to see a significant retracement from this area regardless of what happens afterwards and my view is that we most likely chop around in a topping area for the rest of opex week and then retrace next week. What happens after that is harder to say but I'm leaning more bullish after yesterday.
On EURUSD the IHS neckline was convincingly broken yesterday and EURUSD made it all the way up to the next major resistance level at 1.303. It is retracing now and I'm watching carefully to see whether the 1.292 neckline is tested or rebroken. If it is rebroken then the IHS is less likely to play out to the 1.325 target. If the next major break is up through 1.303 though, then that target will most likely be made. The EURUSD IHS isn't as high quality as the SPX IHS as one shoulder is very much smaller than the other, and that does tend to affect reliability:
I had a query yesterday after I posted the 74% probability of meeting target for the SPX IHS if the neckline is broken. That stat is from Bulkowski based on many past patterns on many stocks and indices, but I had a look at the three year SPX chart to see how these patterns have performed on SPX over recent years.
The two previous large IHS patterns that have formed were from the March 2009 and Feb 2010 lows and both played out to target. The only two large bearish patterns I found were the one from last July that failed, and this year's pattern that has failed so far and looks unlikely to play out to target now. That is encouraging for bulls at least if the current IHS neckline is broken:
30 year treasuries hit my support level earlier in the week, and have since bounced strongly back to the top trendline of the short term declining channel, which was good resistance yesterday. I was reading some speculation yesterday that large scale Fed purchases of treasuries would support the bond market and drive down yields but I have to say that there's little evidence to suggest that is true. Bonds are negatively correlated with equities and the large scale Fed purchases of bonds last year had a very positive effect on equities, but bonds were flat at best. Bonds only really took off when large scale Fed purchases of treasuries ended in March this year.
I've illustrated this with the chart showing 30yr treasury yields with SPX as the background. Yields move up when bond prices move down of course, so the correlation with equities becomes a positive one:
If equities do break up on Feb purchases on bonds therefore, then the strong rally in treasuries that we've seen in recent months is most likely over, and bonds should trend flat to down while USD gets trashed again. That is also common sense as equities rising strongly is in anticipation of a stronger economy, and a stronger economy would strongly imply higher interest rates.
Gold and Silver had massive days yesterday as the rumor that the Fed was going to resume large scale efforts to debase USD once again underlined the value of a store of value that can't be printed. The two year rising channel on gold that I posted last month at 1170 has the next upside target at over 1400, though I'm expecting some retracement when silver hits the February 2008 high at 21.33. Here's the channel on gold:
