Wednesday, January 15, 2014

EDZ6 (et al usfi); False Bull Reverse Following Payroll Data

Price action on the Wednesday before the employment report provided the strongest fixed income sell-off since November 8th release of the October employment report which had initially reported npf at 204K against expectations of 120K.  I had warned last Wednesday that the extent of the decline prior to last Friday’s employment report indicated a changed view and/or an indication of position misalignment… pointing all else equal to lower prices.  The 74K nfp reported on Friday was miles away from the 197K Bloomberg survey consensus estimate and prices adjusted higher accordingly.  It is unclear how much more fixed income prices might have adjusted higher were it not shown that economic agents had a proclivity to relying on expectation of economic traction.

Since Monday however, prices have begun to retreat from post employment report highs.  There is room to suspect that all of the gains since last Wednesday will be erased in rather short order as the Beige Book release later today will likely emphasize the strengthening domestic economic trends. 

Technically, using EDZ6 as a proxy, many securities formed what may have appeared as a strong bullish reverse.  I would point to the hard sell on Wednesday followed by the indecisive ‘doji’ session on Thursday (rather normal in front of nfp) and the following bullish reverse on Friday.  Together this three session combination is (at least in the case of EDZ6) known as a bullish ‘three rivers’.  The price action on Monday seemed again to help to confirm the bullish implications of this pattern.
However, the pattern is struck rather near to the middle of the recent trading range and we should afford it less reliability.  Reversals in general have greater reliability toward price extremes.   Additionally, price action over the last two days could remove as much as half of the gains from Friday and thus discount its bullish implications.  That spot in EDZ6 is 97.6625, so that a settlement today (within 3 days of Friday) at 97.66 or lower would indicate the intermediate term bearish trend will continue.  Currently EDZ6 trades at 97.65. 

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