Tuesday, November 10, 2015

S&P 500 Index and Treasuries Both Reversing (for a time)...

What does it mean to be ‘stretched’?  The urge to be ‘the smartest person in the room’ haunts and has us constantly wanting to pick turning points…that others might not ‘understand’.  Exaggerated moves in assets, those where time, trend and consistency aggravate are the downfall of many managers. 

In my candlestick analysis I take note of trends that are ‘stretched’ by a degree which is inconsistent even within a trending market.  Looking at the number of new highs without a 3 session pause offers some information about the regularity of a trend.  Such regularity, if too long held can prompt unhealthy programmed trading, leading to weak positions. 

Recently, the S&P E-mini December future achieved 21 new session highs without a 3 session pause.  That 21st new high happened last Tuesday.  While there were many decent two session corrections along the way, the contract recovered these interruptions to extend its gains.  In all, the future rose more than 13% from the late September low.

Over the two session period starting last Tuesday, the Dec Emini formed a bearish ‘harami’.  The following two sessions formed ‘doji’.  Their lower closes helped to confirm the bearish implications of the ‘harami’.  Further, while the ‘doji’ points toward ‘indecision’ and is trend unfriendly, the combination of two consecutive ‘doji’ point toward exaggerated indecision and a likely ‘uncoiling’.  Combined, these developments heighten the prospects for a meaningful reverse in equities.  A lower s&p index would at this stage be expected to have global equity implications. 

Even as equities were making new highs and starting their reverse, many U.S. Treasuries and Eurodollar futures were still extending a series on new lows.  The Ten Year Treasury achieved a 13th new session low yesterday.  The contract formed a bullish ‘hammer’ as a result of trade yesterday and thus far today has formed a ‘bullish engulfing’.  We see similar patterns in back month Eurodollars and Five Year Treasuries, though at the extremes of the yield curve, these patterns do not exist. 

The combination of a reversing equity market and a reversing treasury market at the same time offer many opportunities.  We might expect that the employment report finally convinced many traders that the prospects for the Fed initiating policy ‘normalization’ beginning in December could no longer be ignored.  This could certainly have prompted some weaker shorts to enter into the Treasury market after a somewhat protracted decline. 

With the approach of ‘Veterans’ holiday on Wednesday, a cash bond closing event, we can imagine there is a good risk that weaker shorts in USFI may move to the sideline today causing higher Treasury and Eurodollar prices.  Weaker equity prices of themselves offer good positioning strategies.  Today, that equity weakness would be a powerful tailwind to that fixed income buying.    


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