Thursday, October 16, 2014

Treasury Cyclical Yield Low Found

If it stands, as I suspect it will, Wednesday October 15, 2014 will mark an important turning point in the struggle to recognize and achieve a more normal functioning financial market.  Treasury yields driven below levels consistent with trend economic growth of 2.25% have suffered too greatly for anything other than an unforseeable calamity.  When the number of variables, such as the current epidemic concern, numerous geopolitical hotspots (Syria, Iran, Ukraine and Hong Kong) and large discrepancies in regional contributions to global growth persist, it is often sensible to gather as much information as reasonably beneficial about these conditions so as to make informed decisions.  Because the complexity of this information and because it shall forever remain incomplete, we often find benefit at these times from understanding current positioning, a level operating state and technical conditions that might guide more immediately.

For that guide as pertains to the Treasury market currently, I would suggest we note the large scale reduction in open interest in Eurodollar futures in the October 15th session.  Open interest declined by 3.7% in that single session, but had fallen by twice that over the last week of trade.  Clearly there has been an adjustment in sentiment and the level of positions holding a view that the Fed would remove accommodation at a measured pace beginning at or before mid-2015 as recently suggested by a majority of Fed officials and market pundits.  The conditions under which these position adjustments occurred were severe and immediate and without the value of protracted analysis of changes in any of the above mentioned variables. 

Further, the price action suggests an extreme in several ways.  First, using the benchmark 10 Year Treasury future, the 3 point, 10 tic high to low was as great as any since March 18th, 2009 when the nearest to expiry contract had a session range of nearly 4.5 points.  Additionally, the candlestick formed as a result of Wednesday’s trade formed a ‘bearish shooting star’.  This pattern is recognized as a bearish reversal indicator as it recognizes a large area of rejected higher levels compared to the difference between the opening and closing level.  In short, it denotes a level of indecision while recognizing an inability to hold a trend foray into previously uncharted territory.  The retreat from such more often than not finds would-be shorts without positions and recent new longs holding unwanted positions. 

Further still, there had been 13 new session highs without a three session pause, indicating the trend has become rather stretched.  While this is not a definitive sign that a trend is ready to change, it does however indicate a consistency of trend which is difficult to adhere to for long. 

Finally, should today’s price action stand the final minutes of trade today, a bearish formation called a ‘harami’ or pregnant line will have been formed as a result of trade over the last two sessions.  The name of this formation is derived from the speed at which one might expect to find a pregnant woman running.  While there may be exceptions, we generally recognize that speed as lacking from the norm and so consider the trend prospects as limited.  Of course, price action today has also formed a bearish shooting star, where earlier advancing price action was once again reversed. 

One more quick word could be shared on the value of the trend information given in the ‘long upper shadow’ or difference between the body (difference between open and closing price) and the session’s highest price.  Later in a trend or better said, in an established bullish trend, rising prices should evoke confidence on the part of the bullish contingency.  When prices advance, the bullish contingency is expected to support that advance and defend this new found territory.  They should have ample reserves as they have been the recipient of gains to date.  The inability or unwillingness to defend new found gains gives rise to the question of the conviction this ‘controlling’ faction commands.  The chink in their armor is exposed and with this, hungry shorts will try to feast on the supplies left by the retreating bullish contingent. 

In short, the bullish trend we have experienced since mid-September has been very regular until recent when it became extraordinary in volume, price and position adjustment.  The conditions under which it became extraordinary are the result of offside positions, at least with respect to the value associated with new found information concerning the immediate snapshot of economic growth and of course the scare of the unknowable which is the susceptibility for a protracted outbreak of the ebola virus.  To this of course we add the many geopolitical hotspots that languished under a fog of low volatility and the concoction was lethal for those with short Treasury positions and without the deepest of pockets. 

And this is how trends change.  Sometimes in starts and fits from these beginnings and sometimes in straight line.  However, I am becoming increasingly confident that we have found our ‘Cyclical Yield Low’ which shall last until at least the end of March 2015.  For more on my Cyclical Yield Analysis, simply type in cyclical yield in the search box on my Diagnostics By Candlelight blog and some references will surface. 

Thanks for your support; I am currently looking for a home on the ‘Buy Side’ of the street.  I want to gain a position with a portfolio or money management firm that has a strong reputation and would benefit from my understanding of monetary policy, macroeconomics and candlestick charting.    Please advise if you have or know of interest in my services. 

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