The 10 year Treasury Note and 30 year Treasury Bond are at support while the SP 500 is at resistance (and has been for weeks). The disparity between rates of change in the Bond and SP 500 has reached a level that historically signals a pending stock market top, bond market bottom, or both. Higher stocks/lower bonds is deeply embedded in collective market psychology which increases the risk of reversal and a return to risk on/off conditions. Trade setups are presented to take advantage.
10 year Treasury Note Future
Weekly
Chart Prepared by Jamie Saettele, CMT
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While a significant top may be in place for US Treasury Notes and Bonds, the market is at as a good place as any for a bounce to materialize. The ‘place’ is defined by the trendline that extends off of the 2009 and 2011 lows in the Note.
10 year Treasury Note Future
Daily
Chart Prepared by Jamie Saettele, CMT
The 10 year Treasury Note has may be forming a bullish base from the June 24th low. Price filled the previously uncovered close from July 10th today before forming an outside day. Such short term action is bullish, especially in light of the rebound in the 30 year Bond, which traded to the lowest point since the March 2012 low on Friday before carving out a key reversal.
In the Note, estimated resistance is former support at 128’19 and the 5/29 close at 129’15.5. 5/29 was a record day of volume in this market and is also reinforced by the 61.8% retracement of the decline.
30 year Treasury Bond and SP 500 Futures
Daily
Chart Prepared by Jamie Saettele, CMT
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The Bond/Stock ratio has long been a useful market timing tool. One way to normalize markets for comparison is to construct rates of change. In the above chart, the 30 year Bond is in blue and the SP 500 in red. The oscillator plotted is 13 week rate of change on the Bond – 13 week rate of change on the SP 500. Historically, readings as low as the one reached last week have signaled a bottom in the Treasury market, top in the stock market, or both. The most recent reading that did NOT signal a stock market top was in February. The ‘Great Rotation’ camp has grown (Google it) since then as markets have obliged. As a result, higher stocks/lower bonds is deeply embedded in collective market psychology which increases the risk of reversal.
Nikkei 225 and SP 500 Futures
Daily
Chart Prepared by Jamie Saettele, CMT
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FOREXAnalysis: In the last 2 weeks we “focused on the fact that “the new SP high is not confirmed by Nikkei action. Support becoming resistance and vice versa holds true for trendlines as well. Both markets have traded to the underside of former support lines. Don’t be surprised to see another push to satisfy the market’s obsession for round figures. 1700 is just around the corner but make no mistake, any such push would probably be on fumes and signal a top.” The cash market closed on the high today, the Nikkei is nearing resistance, and the underside of the trendline continues to serve as resistance. It’s wait and see but the weight of evidence is bearish.
FOREX Trading Strategy: Looking to play a stock market reversal in FX through USDMXN, USDZAR (below charts).
USDCHF, EURUSD, GBPUSD % Change in 2013
Daily
Chart Prepared by Jamie Saettele, CMT
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A simple look at the % change since the beginning of 2013 illustrates several key points. First, if I’m selling European FX here, then I’m doing it through GBPUSD, which is in a downtrend since the beginning of the year and has consolidated since March. Second, the USDCHF has been supported on each drop towards the open for the year (since April)….that is bullish.
GBPUSD
Hourly
Chart Prepared by Jamie Saettele, CMT using Marketscope 2.0
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FOREXAnalysis: Cable’s run at the European close reversed right at the 61.8% retracement of the decline from the July high. 1.5308 is also the exact close of the 5 am (NY) hour from 7/25, which was the release UK GDP. News releases produce significant volume and large volume areas tend to serve as support/resistance in the future if/when reached. Here is another look.
FOREX Trading Strategy: Short, stop above July high.
Daily
Chart Prepared by Jamie Saettele, CMT using Marketscope 2.0
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FOREXAnalysis: If risk on/off market conditions reappear (as suggested by the presented Treasury market and SP 500 charts and comments), then expect a weak USDJPY. Today’s high is right at the April high and a short term trendline. Longer term trendlines are slightly above Friday’s high and a test there can’t be ruled out just yet.
FOREX Trading Strategy: Will examine the short term picture as it develops next week but looking for bearish setups.
GBPJPY
4Hour
Chart Prepared by Jamie Saettele, CMT using Marketscope 2.0
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FOREXAnalysis: The GBPJPY bounced from the trendine that extends off of the February and April lows. Price is nearing an area that has served as an important pivot in recent months. The 61.8% of the decline is at 151.82 as well. At these levels, it makes sense to be bearish GBPJPY again.
FOREX Trading Strategy: Same as USDJPY…will monitor short term developments next week (Bank of Japan is next week) but expect to do something soon.
USDCHF
4Hour
Chart Prepared by Jamie Saettele, CMT using Marketscope 2.0
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FOREXAnalysis: “The pattern is the exact inverse of the EURUSD (A-B-C decline with wave C as a diagonal). If the interpretation is correct, then the wave C diagonal (from .9533) will probably be retraced quickly.” The break above the resistance line and pullback into that same line, which is now support, is the bullish setup.
FOREX Trading Strategy: Long, stop .9220.
USDMXN
4Hour
Chart Prepared by Jamie Saettele, CMT using Marketscope 2.0
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FOREXAnalysis: Wrote last week that “5/22 is an important day. That is the Nikkei top and it was the SP top for a time. It was also a large volume day across many markets, including USDMXN. The close of that day is estimated support at 12.42. If the SP pushes to a final high, USDMXN might try for 12.42 but the rally from the 7/18 low is in 5 waves, which suggests that the market has turned.” The USDMXN rallied all week before declining sharply today. Near term support is the top side of the former trendline, 61.8% retracement at 12.61 and 12.56.
FOREX Trading Strategy: Look for a low to get long between 12.56 and 12.61.
USDZAR
Daily
Chart Prepared by Jamie Saettele, CMT using Marketscope 2.0
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FOREXAnalysis: “USDZAR has pulled back slowly over the last 6 weeks to test a former upward sloping resistance line. A large range key reversal unfolded on Wednesday after price dipped just under the line. The market response is promising. The daily RSI dip below 40 is characteristic of a market attempting to bottom within a larger bull trend.”
FOREX Trading Strategy: Quite possible that a low is in place. An intraday plot of the rally from the low shows a sharp advance with a potentially completed flat correction from the 7/24 high. Look for a pullback to get long at 9.78.
— Written by Jamie Saettele, CMT, Senior Technical Strategist for DailyFX.com
To contact Jamie e-mail jsaettele@dailyfx.com. Follow him on Twitter @JamieSaettele
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Jamie is the author of Sentiment in the Forex Market.