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Bonds put in a pretty good performance last week. The candle chart for
Friday could be considered a bullish engulfing line, although we only
matched the low from earlier this week, and the weekly candle looks to
be a hammer. The real question right now is whether or not bonds have
bottomed.
Consider that we do have a decent five wave pattern down on the daily
chart from 117-21 (though the intraday pattern is less clear). But, we
failed to get below the previous (Globex) low at 113-05. I really do not
like failed 5ths.
To be sure, one would expect that open interest fell yesterday. So,
Friday almost certainly saw a decent amount of short covering. Remember,
we had an auction on Thursday and there was lots of hedging. If the PPI
data brought real demand, then the street had a lot of covering to do.
And o.i. has been rising of late too.
Sometimes, short covering does turn into real buying. I have seen o.i.
decrease at times at the start of a rally, especially when it is at very
high levels as a trend ends. There is some risk of that now.
For hints, we should watch a few levels. First place to look is 114-27.
That is 62% back to the 115-24 peak the prior week. Above there makes it
less likely that we are nesting within the five wave drop from there.
Then, we want to rally past the 50% retracement of 117-21/113-09 at
115-15 and take out 115-24. At this point, the bulls are going to be
feeling mighty big. BUT, the real test comes from the trendline off
lastyear's highs, at 116-01 on Monday and falling around 2/32nds per
week. A burst through there, which would also be well above the 62%
retracement of the fall from 117-21 (115-21) would be a good sign that
bonds have bottomed. Absent that activity, I will have to assume that a
bottom is not in as yet.
More things to be aware of: Indicators are bullish. For one, WEEKLY MACD
crossed positively a couple of weeks back from its lowest level since
its low in 1996. Daily stochs also crossed positively today. We also
came within 3/8ths of a point of the long term trendline going back to
1984 on futures.
The only reason to be concerned that bonds are not set to rally is that
I still suspect that equities have lower to go. Though, even that is
less clear after today's pop. Bonds can rally well past 120 if this is a
bottom for now.
The market is coming to the realization that though the Fed is likely to
increase rates on the 24th, that will be the only hike, certainly for
the rest of this year. The odds then are no inflation, with an outside
chance (okay a snowball's chance in hell) that the economy could slow up
just a tad -- enough to satisfy the Fed, keep inflation at bay, and
untighten the labor market a bit. That will also be enough to send
stocks and bonds higher again.
The bottom line is we are not and never were in full crash position.
Though I still prefer a run at cash SPX to 1230 or so, my extended 1170
target looks less likely now. And bonds will need strong price data to
convince them that the Fed could go again in October. It is highly
unlikely they go after that, especially with Y2K.
---
Steven W. Poser, President
Poser Global Market Strategies Inc.
url: http://www.poserglobal.com
email: swp@xxxxxxxxxxxxxxx
Tel: 201-995-0845
Fax: 201-995-0846
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