Thursday, September 9, 2010

Market Timing Update (9/9/10 Close)

[508PM]ES update
Additional sell-off and a lower low after the cash market close.

[4PM Stocks and Bonds]

Primary count - Today's price action raises the possibility that the market is still in the major correction to the rebound from the 1040 area. In other words, wave (b)-down or (iv)-down may not be complete and today's high is wave b of the consolidation, with wave c-down now in progress, either as a part of a triangle or a flat. (Red in Chart 1).

Chart 2(Sep emini) and Chart 3 (Dec emini) present wave counts in more detail, considering that we are in the middle of a futures roll period.

Given the deep retrace this afternoon, it's best to consider the retrace as a second wave that corrects the first wave decline from today's high, as indicated in Chart 2.

Alternatives -

Naturally, at this early stage, there are more bullish and bearish alternatives. On the bullish side.

1s2s of (v)-up or (c)-up represents an ultra bullish count. The other possibility is a large expanding ED as mentioned in the intraday update. But the market needs to take out this PM's high and then today's high first.

[ii]-up of 3-down having topped represents an ultra bearish count, but the market had better continue to drop without much of a pause.

For now, the count in between - the primary count discussed above - looks appealing, based on the wave structure as well as OpEx next week.

Bonds -
Today's 30-year bond auction was less "successful" - it tailed more than 2bp with a yield of 3.82%. Primary dealers got stuck with over half of the $13bn supply, the largest over nearly a year.

The primary market seems to have "timidly" begun to demand higher yield, for whatever reasons (hope or fear). Now that it's up to the dealers to distribute the inventory in the secondary market, it'll be interesting to see if there's any follow through. Note that there has been some follow through after the 1PM auction in the 30-year yield (Chart 4).

For a long term analysis and outlook on U.S. rates at the long end, see The Bond Mania (8/20/10).