US Fixed Income prices

The Bull's cage (or pen) has been rattled and the so called plunge is seemingly here. But is it really?

Friday was an intra-day reversal. But does it mean that the Bear market rally is over. Some Bears do believe that and there is plenty of evidence in the weakening breadth and exhausting momentum that now is the time to see a big "Correction" or perhaps a big roll over.

I am looking at the US 10 Year Note Yields for clues to the direction of Equity markets.

Here are two charts, a 5 year weekly and a daily chart of the US 10 year note yields. Keep in mind that yields move inverse to prices. The weekly charts tells us that yields did bottom in Dec 08 and prices topped. The yields have been and are still an uptrend. Since the Equities lag Fixed Income, they also bottomed in Mar 09 and have been rallying.

Looking at the daily chart, I see that the uptrend since Dec 08 is pausing. My Elliott Wave count is given in Green. As per the primary count, we are currently in Wave 4 of the impulsive advance that began Dec 08.

On 10-2-09, the yields fell through an important support at 3.27 level but the drop was reversed 50%. The crucial point is 3.05. If that area is violated, the primary count will be negated (area of wave (i)). In that case, the alternate count marked in magenta will become the primary count. That count says that we are in a-b-c Zigzag correction.

Also, note that the drop has become sharp and the slope of successive resistance lines is becoming steeper.

I will be watching the 3.05 level very carefully. Its breach will confirm that happy days for Bears are here again. With the 3rd quarter earning season in the tow, it may well be the case.

But keep in mind that the primary count is still in vogue currently and that dictates a turnaround and yields topping 4.01 for the 10 year Note.

The break of downward sloping resistance trend line, shooting past 3.27 and break of higher resistance trend line will confirm that the yields will rise and so will the S&P 500!

S&P 500 and the arcs

SPX daily chart with Fibonacci arcs looks beautiful! It is somewhat subjective as I have tried to curve-fit it :)

The action since March 09 has found resistance at 61.8% level and support at 50% arc. Eventually, the 38.2% arc supported the pullback. Now it is going towards the 78.6% arc.

But wait, is it a tombstone Doji today (actually yesterday since it is past midnight)?

It is. That too after an uptrend. You know what it means : sell the futures.

Plus: momentum is diverging.

End of the day action on Friday

Sell the futures.


The last 45 minutes of the end of the day action on Friday Aug 14th is highlighted by shaded areas. These are 15 minute charts. Point to keep in mind is that the futures are open till 16:15 hours EST while the stocks have regular trading hours till 16:00 hrs EST.


What does the recovery at the end of the day on a Friday mean?

Short covering or bulls getting back in and want to own positions over the weekend?


The former seems more probable. Bearish chatter has found its audience over the last week or so. People may be short going into the weekend and incoming data but their view was not fruitful; hence the short covering.


The other probability that new bullish positions were put on going into the weekend is less likely but certainly possible. But looking at the very recent strength in US Dollar and the largest bank failure of 2009 on the cards (it actually did happen), putting in new bullish positions will be throwing caution to the winds.

My view is the recovery is short covering. The Breadth (Up Volume - Down Volume) did not improve (it was lower) while the E mini SPX futures went up.

Momentum of SPY

One of the concepts that Connie Brown outlines in her marvellous book, "Technical Analysis for the Trading Professional" is that of Oscillator ranges. In short watch the RSI level (blue line below) of 38.48 on the SPY. If that holds and the RSI bounces from there, the trend of the SPY (and $SPX) will be bullish. But if that level breaks then one can infer that the Bear days are back again for some time.

Now this is not a short term trading tool but do remember to look it up when the time comes. When we will be at that level, the "Experts" will be divided and will be telling their story from their side of the fence and some from the fence. This can add objectivity into the mix and clarify things.

Sell in May and go away?

The marketplace is abuzz with the ideas like “the worst is over”, “markets will be fine by the end of the year”, “and it (from March lows) is a bear market rally”, “sell in May and go away”, “Wait; not this May: it is different this time” and the sound bites go on and on.

SPX daily


First let’s look at the daily chart of SPX (S&P 500) going back 10 years so that we can see the action in 2002 and 2003. The first oval in 2002 and 2003 is where SPX made a base and changed direction. The second oval is current price action.
We can see that in each oval is representing an area of consolidation. The market is trying to base.

SPX daily with price removed and 50, 200 SMA


Now let’s look at the same chart with price removed and showing 50 period (Green) and 200 period (Red) SMA (Simple Moving Average).

The direction of 50 SMA crossing 200 SMA is the direction of trend, i.e. up or down. The distance between the two averages is the momentum of the trend.

The first oval: Notice that during the steep decline of 2002, the 50 SMA is running away from the 200 SMA but during Nov 2002 the averages started coming nearer. Still, the trend had not reversed; the market was trying to find its bottom, 200 SMA was still declining. Finally in Apr 2003, 50 SMA again started moving up. This time 200 SMA slowed its decline and changed its slope upwards (May, June 2002).

The second oval: Currently, the distance between 50 and 200 sma is pretty wide. For the market to base and change the trend this distance needs to shrink. Thereafter 50 need to cross the 200 from below to signal the change in trend.

The crossover of 50 SMA and 200 SMA comes with a lag. In the daily chart it is a late signal that will come after market would already have bounced some distance from the bottom. But when you see it, you can be more certain that the trend has changed.

If one’s time horizon is not small (meaning one is not a day trader or a swing trader), one can indeed “sell in May and go away”. The market has more water to tread. Obviously, for time sensitive vehicles like nearer term options this signal by itself may not be appropriate.