Posted on Feb 01, 2023, 07:28 by Dave Toth

Following shorter-term momentum failures in both the short- and longer-ends of the yield curve over the past few days, navigating this afternoon’s Fed announcement and Fri’s Jan unemployment and nonfarm payroll reports becomes even more challenging and eventful.  Below we discuss the latest resulting key flexion points around which to base directional biases and exposure commensurate with one’s personal risk profile.

MAR24 SOFR

In Fri’s Technical Blog we discussed that day’s bearish divergence in shorter-term momentum below 17-Jan’s 96.08 corrective low that, in fact, broke the uptrend from at least 06-Jan’s 95.73 low.  This momentum failure defined 19-Jan’s 96.39 high as one of developing importance and THE high this market now must now recoup to confirm the past couple weeks’ setback as another correction within a broader base/correction/reversal count.  In this vein, this 96.39 high serves as our short-term risk parameter from which shorter-term traders can objectively base non-bullish decisions like long-covers and cautious bearish punts.

On an even shorter-term basis, the 240-min chart below also shows Fri/Mon’s resumption of this relapse leaving 25-Jan’s 96.205 high in its wake as a smaller-degree corrective high the market would be expected to sustain losses below per a more immediate bearish count.  A recovery above 96.205 would raise the odds that the relapse from 96.39 is a 3-wave and thus corrective affair within a broader base/reversal count.  Especially with this relapse thus far stalling at the (95.98) 61.8% retrace of Jan’s portion of the base/recovery from 95.73-to-96.39, a recovery above 96.205 would be hard to overlook as an early indication of a resumption of the broader base/reversal count.  Per such, this 96.205 level serves as a mini risk parameter around which shorter-term traders can objectively toggle directional biases and exposure.

Stepping back to a longer-term view, the daily chart above and weekly close-only chart below shows the technical elements on which a larger-degree base/correction/reversal count is predicated:

• confirmed bullish divergences in both daily (on 15-Nov) and weekly (on 01-Dec) momentum amidst
• historically bearish (21%) sentiment/contrary opinion levels in the Bullish Consensus (marketvane.net) not seen since 2006, and
• an arguably textbook complete and massive 5-wave Elliott sequence down from Aug’20’s 99.965 high weekly close in which
• the suspected 5th-Wave down from 29Jul22’s 97.50 high came within a basis point of its (95.48) 0.618 progression of the net distance of Waves-1-thru-III from 99.965 to 96.695.

This is a unique and compelling confluence of technical facts and observations that warn of a base/correction/reversal higher that could be major in scope.

On this broader scale, Jan’s resumption of the recovery above initial Nov and Dec highs at 96.11 and 96.28 reinforces the base/reversal count with the very important by-product being the market’s definition of 06-Jan’s 95.73 low as the latest larger-degree corrective low.  Thus far, the recovery from 04-Nov’s 95.30 intra-day low is obviously only a 3-wave affair to 19-Jan’s 96.39 high.  But to CONFIRM this recovery as a 3-wave structure and break the developing uptrend from Nov’s 95.30 low, the market must absolutely fail below 06-Jan’s 95.73 larger-degree corrective low.  Per such, this 95.73 level remains intact as our key longer-term risk parameter from which longer-term institutional players can objectively base and manage a recommended bullish policy and exposure.  A recovery above 96.205 initial and subsequently above 96.39 will reinforce this broader bullish count while a relapse below 95.73 will threaten it enough to warrant a move to the sidelines by institutional players.

In sum, the short-term trend is down with a recovery above 96.205 required to threaten this call and further strength above 96.39 to negate it while the longer-term trend remains up with a failure below 95.73 required to break it.  Traders are advised to toggle directional biases and exposure around these three levels commensurate with their personal risk profiles.

MAR 10-YR T-NOTES

As a result of Mon’s short-term momentum failure below 17-Jan’s 114.095 corrective low discussed in Mon’s Technical Blog, for all intents and circumstances we have an identical technical construct in the 10-yr T-note market to that detailed above in the short-end of the curve with smaller-degree corrective highs and bear risk parameters at 115.13 and 116.08 and a longer-term bull risk parameter defined by 30-Dec’s 111.28 larger-degree corrective low.  If the past week-and-a-half’s setback from 19-Jan’s 116.08 high is just another smaller-degree corrective hiccup within broader basing behavior that dates back over three months, a recovery above 115.13 will provide early proof of such while a recovery above 116.08 will obviously confirm it.  Until such strength is resurrected, Mon’s admittedly short-term momentum failure cannot be ignored as a sign of at least short-to-intermediate-term weakness that has further to go.

From a longer-term perspective, the daily (above) and weekly (below) charts show excellent basing behavior from 21Oct22’s 108.265 low that requires proof of larger-degree weakness below 30-Dec’s 111.28 larger-degree corrective low and key longer-term bull risk parameter to negate.  Now in Mon’s Technical Blog we discussed the prospect that Oct-Jan’s rally might be a complete 5-wave affair as labeled above.  If this count is correct, then a (B- or 2nd-Wave) correction back down that could span weeks or even more than a month would be expected and that could easily reach the 111-handle.  A recovery above 19-Jan’s 116.08 high will not only negate such a setback, but also resurrect a base/reversal count that could expose protracted gains in the weeks and months thereafter.

These issues considered, a neutral-to-cautiously-bearish stance is advised for shorter-term traders with a recovery above 115.13 threatening this call and further strength above 116.08 negating it and warranting a return to a bullish policy.  Longer-term institutional players remain advised to maintain a bullish policy and exposure with a failure below 111.28 required to defer or threaten this call enough to warrant a move to the sidelines.  Longer-term players also have the option of paring bullish exposure to more conservative levels and acknowledging and accepting whipsaw risk, back above 116.08, in exchange for steeper nominal risk below 111.28.