(TY) Scale Key to Navigating 10-yr T-Note Peak/Reversal Threat

By: RJO MRTFebruary 23, 2012 7:56am CST 7755


Technicals, February 23, 2012; 7:35am

The 240-min chart below shows that the market's recovery above 17-Feb's 130.315 high confirms a bullish divergence in momentum. This is a technical fact that defines Tue's 130.12 low as the end to at least the decline from 15-Feb's 131.245 high. Minimally, a correction of this 131.245 - 130.12 decline is exposed and a failure below 130.12 is required to confirm the end of this currently suspected bear-market correction and resumption of the past month's broader developing decline. In this regard, the market has defined 130.12 as a short-term but objective parameter around which to base interim non-bearish decisions like short-covers and cautious bullish punts.


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But here's the rub: thus far and despite the fact that the market broke the uptrend line merely derived by connecting the Oct and Jan lows, the past month's sell-off attempt is only a 3-wave structure. Left unaltered by renewed weakness below Tue's increasingly important 130.12 low and given the dominance of the secular advance, the decline from 31-Jan's 132.11 high could be just another correction within the major bull.

For reasons that we'll discuss more fully below, we have fostered a broader peak/reversal policy since the market's early-Feb failure to sustain late-Jan's breakout above four months of resistance from the general 131-3/4-area shown in the daily chart below. This week's break below 09-Feb's initial counter-trend low of 130.18 confirms at least the intermediate-term trend as down, reinforces this bearish bias, and defines 15-Feb's 131.25 corrective high as the key risk parameter the market is now required to recoup to negate this broader bearish count.

Given this bias, we'd like to think that this week's break below the trend line connecting the pertinent Oct and Jan lows reinforces our case. But given the lack of evidence that suggests merely derived technical levels like trend lines, Bollinger Bands, Fibonacci relationships and moving averages have any degree of reliability whatsoever, we take virtually no comfort in this trend line break as a reinforcing factor to our preferred bearish count. Indeed, this break- especially given its 3-wave structure thus far- could be similar to mid-Jan's break below the previous uptrend derived from connecting Oct and Dec lows that proved to be nothing but corrective within the broader bull.

We discuss this potential fly in the bearish ointment so as not to get too complacent with a new bearish policy, especially after a confirmed bullish divergence in admittedly short-term momentum and against an insanely bullish trend that only a month ago posted its highest level in 31 years! So the issue of technical and trading "scale" is a particularly important one currently, with weakness below 130.12 required to diffuse at least an interim correction higher and strength above 131.25 required to threaten a broader bearish count and re-expose the secular advance.


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The daily log close-only chart of actual 10-yr yields below shows that the 2.06% level we have highlighted in recent updates remains a source of resistance, the break above which remains required to reinforce a forecast calling for higher rates and lower prices. 15-Feb's 1.92% low remains as the risk parameter this market needs to fail below to threaten a count calling for higher rates. This 1.92% yield level correlates with the 131.25 high and risk parameter basis the Mar futures contract discussed above.


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There are two main technical reasons we are concerned about a major peak/reversal threat: waning upside momentum shown in the weekly chart below accompanied by historic levels of bullish sentiment accorded this market that have preceded major corrections or reversals lower in the past. The recent 77% reading in the Bullish Consensus measure of market sentiment (www.marketvane.net) indicates the same amount of frothy sentiment that accompanied last Sep-Oct's sharp 5-point correction and Nov'10's major reversal lower. And the market's confirmed bearish divergence this month below 130.18 renders sentiment an applicable technical tool currently and for as long as the market sustains losses below recent corrective highs alike 131.25.

In sum, a bearish policy remains advised for longer-term players with strength above 131.25 required to threaten this view enough to warrant moving back to a neutral/sideline position. As a result of a confirmed bullish divergence in short-term momentum however, shorter-term traders with tighter risk profiles have been advised to pare or neutralize their bearish exposure and move to a neutral/sideline position, with resumed weakness below 130.12 now required to resume a bearish policy and exposure. And should the market relapse below 130.12, traders are warned that such reaffirmation of this developing downtrend could lead to accelerated, even relentless losses thereafter.


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