2/01/11 – 8:15 – Yesterday the treasuries did what markets seem to always do following a Friday ‘flight to quality rally’; they gave back much of the gains. Not that I expected that to happen since based on how I look at markets, there was ample evidence that the rally would extend and to some extent I think there still is. But while the situation in Egypt, which sparked the rally on Friday, is anything but over, just why one would buy a long-dated treasury because of it might be the question traders and investors are asking themselves. At any rate, the 10-year traded below 120-23+ which was my ‘early warning’ signal that the rally may not unfold as expected but it held above my 15+ ‘stop’ level and I’m just not ready to give up on the prospects for further upside. It is dicey though and I’ll be approaching the long side with caution as I remain of the opinion that the big trade coming is the short that will come out of this now 6 week long correction.
When the treasuries made their lows on 12/16, there was good timing for a change of trend and I was expecting to see a low from which I thought a corrective rally would commence. That was based mostly on the fact that the decline that began last Fall looked incomplete using wave analysis. Today I think that the rallies are corrections not only because of what they did prior to 12/16 but also because of what they have done since 12/16. In my ‘Charts for the Day’ section below, I am going to post snapshots of the 4 charts I spend most of my time on since while they may not all look alike, they certainly all look corrective from a wave perspective. First though, I should point out that the oscillators all continued to hold their own higher through yesterday with only my Cycle Stochastic hitting overbought levels and there only barely. With the softening markets this morning, they are backing off a bit but again, not from what would typically be alarming levels. The daily Price Proxy remains in a buy mode so for the most part, if there is anything to be taken from the indicators it would be that not much has changed – about what I take from the wave structure. And then there’s volume which came in at a little better than 2/3rds of what we saw during the 2 rally days that finished off last week so there too, not much has changed. Everything still tells me we can push a little higher although one more day like yesterday and that might no longer be the case.
Summary: With the treasuries under pressure this morning my current friendly pattern based on the very short-term wave structure is in danger of breaking down. That is not to say the entire correction will then be over but with a longer-term negative bias, that thought remains in the back of my mind every time I see a rally fail. This is another one of those days when I have trouble with my sell stop based on the current market in relation to my supports. The 10’s are trading below support right at my 120-15+/19+ support and the next level that I see is at 120-04/06 which is minor but 119-28/01 is not and therein lies the problem. I can’t see selling below 04 with better support at 01 and below 119-28 is just too far away so I’ll bite the bullet and use 120-14+ as my sell-stop for today. I’d also sell against first resistance at 121-01. Hopefully tomorrow will allow for a little better risk control.
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