Rebel Traders – Analysis Without The Hype

TLT Daily Chart

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TLT Daily Chart

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All eyes will be on the bond market this coming trading week. There are numerous charts that are showing a significant ‘event’ is in the works. Whether it be corporate bonds or US Treasuries, all have some form of a major resistance or support level that is going to be challenged this coming week.

(click on charts for large view)

Let’s start with one of the mostly followed charts, the 10 year treasury note yield ($TNX). Remember that yield is inverted to price. So when money pours into treasuries (for safety) the price goes up and the yield goes down.

In this chart ($TNX) we are looking at yields. A technical analysis of this chart reveals a rising channel from the beginning of the year. The dotted line is a trend line beginning in mid March. From these two simple analysis tools we see that the 10 year yield last Friday fell below the trend line. Also observe the RSI, which has fallen well below its trend from the start of the year. What can we take away from this? It would appear to us ‘chart readers’ that the probabilities of the yield falling further over the coming weeks is high. The drop should be at least to the lower channel line which would act as support.

If the 10 year yield does begin to drop then we would also see bond prices rise. That brings us to the next chart which is the TLT (iShares 20+), this fund generally tracks the long end of the price curve. On this chart observe that the price is currently right at a down trend resistance line. The two dotted lines represent long term resistance levels. The TLT chart presents us with a very interesting situation right here and now. Should the $TNX (10 year yield) drop this coming week that would correlate to rising bond prices and the TLT will break above the trend line. But a break above the trend line would quickly run into longer term resistance levels (dotted lines).

If the down sloping trend line on the TLT holds, then we can expect to see falling prices and rising yields. Actually either outcome is a bad signal for the broader equity markets because a drastic drop in yields may signal a rapid movement of funds back into the perceived ’safety trade’, and out of the equity market. Should yields continue to rise, then the economy is faced with a very difficult situation where the rising yields is a hindrance to the housing market and all other types of ‘credit’. A situation that stifles growth.

On the other side of TLT is TBT, this is the ultra short of the Barclays Capital 20+ Year U.S. Treasury Index (TLT works just as well here for comparison). TBT rises when TLT drops, and vice verse.

Just as on the TLT chart, we can see that TBT is also at a critical spot. At this time TBT is resting on the up-sloping trend line beginning in December of 2008. Moreover, it is also sitting at a significant Fibonacci retracement level. Now here is the situation, If the 10 year yield (remember the 10 year yield is the most widely watched) falls this will mean that bond prices are rising. This will send the TLT upwards and the TBT will drop below its trend line shown here. Should that happen we may expect to see a drastic reaction in the equities market with a violent down ward move.

And what happens if the 10 year yield rises further? Then the TLT will fall and TBT will rise. The reaction in the equities market may be an initial upward rise, however one must remember that the financial market are starving for credit and rising yields would dampen efforts to unfreeze credit markets and Ben Bernanke will be forced to pull liquidity, essentially draining the equity markets of much needed liquidity and sending stock prices back down.

Given where the volatility index ($VIX) is currently sitting it says that this coming week will indeed be very active.

What about corporate debt? The next two charts reveal similar ‘on the cusp’ of a significant event. The first is that of the JP Morgan Emerging Markets Debt fund (EMB). Observe on the EMB chart that it is currently very near a significant resistance level.

And the final chart is that of the iShares Investment Grade Corporate Bond fund. This too is currently at a very significant resistance level. Should these resistance levels hold, then it will signal that credit conditions are deteriorating once again.

I anticipate a fairly significant trading week ahead. My forecast for the equity markets remains bearish.

Dow Chemical (DOW) issued a press statement this morning concerning the Kuwaiti deal that fell through last week. Dow vows to pull the stops on trying to get every $$ out of this situation.

CEO: KUWAIT DAMAGES ARE NOT LIMITED TO $2B, TO SEEK ‘MULTIPLE BILLIONS OF DOLLARS’
- Plans to sue Kuwait and seek arbitration
- To announce new plastics venture partner this year
- Plans to raise no less than $7.5B from venture, divestitures
- Sees no signs of demand bottoming as of now

The CEO makes no mention of the deal with Rohm & Haas (ROH).

There are two big events today in the market. At 10:00am (US EST) we will get the December ISM (non manufacturing) data and then at 2:00pm we get the FOMC minutes from the meeting that put the Fed Funds rate down to zero. This should be VERY interesting. I think the FOMC minutes will be more important than anything else that is scheduled today.

(read more…)

Remember the prestigious Waterford Crystal that was sought after by collectors and connoisseurs alike? Today the company that has roots dating back as far back as 1783 announced it filed for ‘administration’ (the British term for bankruptcy).

From the Scotland Herald:

AROUND 2700 jobs are under threat at Waterford Wedgwood after the historic crystal and china maker became the latest big-name casualty of the economic turndown.

The luxury goods firm – best known for Wedgwood pottery, Royal Doulton and Waterford crystal – yesterday appointed Deloitte as administrators at its UK arm.

Receivers have also been brought in to parts of its Irish business. Waterford, which can trace its origins back 250 years, collapsed after talks over a potential sale to a US private equity firm failed and lenders walked away from the deal.[...]

Reports of December auto sales released today were some of the worst on record, Senate majority leader Reid says the stimulus package may go as high as $1.3 Trillion, and U.S. firms are lining up to become ‘bank holding companies’. Yep, the economy is just fine… (sarcasm)

(read more…)

Little change this morning in the futures. OF interest however is the 10 year yield ($TNX) is currently up 2.6%. We should see drop in prices of the TLT (and a gain in the TBT) this morning.

Other than that I am hard pressed to find anything of great interest this morning to report. We will have to see what the market has in store for us today without any significant news (good or bad) this morning.

But there is still some more news coming in 30 minutes :

10:00am Nov New Home Sales (last 433K, m/m -5.3%), Nov Existing Home Sales (last 4.98M, m/m last -3.1%), Oct House Price Index m/m (last -1.3%)

The S&P 500 E-Mini Futures Chart I posted last night remains the one to watch for now.