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Wednesday September 15, 2010 - 01:54:26 GMT
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Bonds Rally Despite Friendly U.S. Economic Reports

Despite the friendly retail sales and business inventory reports, December Treasury Bonds continued the rally which began on Monday after the market finished its correction of the 124’22 to 135’19 range when it found support at the .618 level at 129’11.


The current chart pattern suggests that a retracement to 131’24 is likely. This price forms a resistance cluster with a downtrending Gann angle at 131’27. This cluster is very important on Wednesday. Selling pressure could come in; triggering a short-term break or the market can accelerate to the upside over this zone.


What the current chart pattern is suggesting is that the market just finished a correction. This assumption can be made because we know that the Fed has been buying T-Bonds and are likely to continue to do so. How do we know this? Because the Fed told us at its August meeting that it would be buying T-Bonds.


Like it or not, the Fed is now an investor and has the capability to move a market. This means that like an investor, the Fed may not want to chase the market higher, but instead wait for dips and pullbacks into value areas. After the Fed’s announcement in August, T-Bonds went on a tear. The Fed was not looking to chase the market higher, so it most likely opted to wait for a pull-back. Paying too much for an investment would have hurt the Fed’s strategy.


The conclusion that can be reached is that T-Bonds were boosted by the increased amount of government debt that the Federal Reserve will buy in the coming weeks. According to Reuters, a report from the central bank on Monday said the Fed plans to buy about $27 billion of Treasuries starting later this week to early October. This is $9 billion more than its initial round of government debt purchase that began in August.


If the Fed is aggressive tomorrow then the market is likely to break through the resistance zone at 131’24 – 131’27. If the Fed deems this price too expensive, then look for selling pressure to trigger the start of a short-term break.


Stocks surged to the upside on Tuesday after a small profit-taking break overnight, driven higher by a better outlook for the economy. Appetite for higher risk assets increased, following better than expected U.S. retail sales and business inventory reports.


For a few days, I’ve been talking about the possibility of a rally and that the key was whether U.S. investors would chase this market higher or wait for a dip. Today’s action was a strong sign that U.S. market players continue to prefer buying breaks over buying strength.


Today’s rally in the December E-mini S&P 500 stopped short of the breaking out over a pair of tops at 1122.00 and 1124.50. The December E-mini Dow was in a position to challenge the August 9 main top at 10614. The December E-mini NASDAQ remained the strongest after breaking the swing top at 1918.00. The new target is the June 21 top at 1941.00.


The upside momentum the past few days has been impressive, but there is still much debate as to whether these markets are still in a range.


The U.S. Dollar declined against all the major currencies on Tuesday after economic reports showed U.S. retail sales and business inventories rose more than analyst expectations.


The friendly data helped ease investor concerns about the outlook for the global economy, making them more willing to buy riskier assets. Increased appetite for risk drove up demand for stocks and commodities while encouraging the liquidation of assets considered safer, such as the U.S. Dollar.


Traders bought the Euro after the friendly report was released. The December Euro rallied sharply higher for the second day in a row following a slight setback overnight.  Now that the daily chart has reaffirmed its uptrend, momentum is likely to carry this pair into a Fibonacci/Gann angle price cluster at 1.3049.


Early in the session the Euro was trading lower; giving back some of yesterday’s gains after it was reported that the ZEW indicator of German economic sentiment fell sharply in September to -4.3 from 14 in August. Pre-report economist guesses were for a drop in the index to 9.0.


Despite the overnight weakness, the main uptrend never appeared to be threatened. Traders were basically using the report to pare positions ahead of today’s U.S. retail sales number after yesterday’s sharp move to the upside. Although the report showed economic sentiment had dropped more than expected, the odds remain low that Europe will experience a double-dip recession. The strong rise in the Euro at the Dollar’s expense suggests that investors believe that the European economy will recover faster than the U.S. economy.


Investors continued to underpin the December Japanese Yen even after current Prime Minister Kan was retained by voters after today’s election. The decision to continue to support the Japanese Yen is a sign that investors are not confident the government or the Bank of Japan’s intent to intervene is not being taken seriously.  Furthermore, investors also feel that an intervention may not be successful now because it requires the cooperation of other central banks which may not be very helpful at this time due to their dealing with economic issues of their own.


Technically, at a minimum, this market is going to have to produce a daily closing price reversal top to get the ball rolling to the downside. The best sign of a top, however, will be the formation of a weekly reversal, but we won’t know it has formed until later in the week.


The December British Pound finally broke through the downtrending Gann angle which had held this market down since the 1.5997 top formed on August 6. This angle came in on Tuesday at 1.5457. The sharp acceleration to the upside took out stops and attracted fresh buying. The current chart formation and upside momentum indicates that this market is likely to rally over the short-run into a retracement zone at 1.5647 to 1.5729.


Continue to look for the Dollar to weaken as long as there is demand for higher risk assets. In addition, traders must monitor U.S. economic reports. At this time it seems, investors are selling the Dollar on good U.S. economic news but at some point in the future this way of thinking is going to shift. Based on the rally in the T-Bond market, it looks as if investors still expect lower yields, which translates into a weaker outlook for the economy. The Dollar is likely to continue to weaken against the Euro as long as investors believe that the Euro Zone economy is on a faster path to recovery than the U.S. economy.


Watch the stock market and the Euro as to whether this demand is waning. The problem with the markets lately has been the lack of follow-through and the tendency to take small, quick profits. Coupled with high volatility, this could lead to wild swings.


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GVI Trading. Potential Price Risk Scale
AA: Major, A: High, B: Medium

Tue 31 July 2018
AA JP- Bank of Japan
A 06:00 DE- Retail Sales
A 09:00 EZ- flash HICP/GDP
AA 12:30 US- Core PCE Deflator
A 14:00 US- CB Consumer Confidence
Wed 1 Aug 2018
A Final Mfg PMIs
AA 12:15 US- ADP Private Payrolls
A 15:00 US- EIA Crude
AA 18:00 US- Federal Reserve Decision
Thu 2 Aug 2018
AA 11:00 GB- Bank of England Decision
A 13:30 US- Weekly Jobless
Fri 3 Aug 2018
A Final Services PMIs
AA 12:30 US- Employment
A 12:30 US/CA- Trade

John M. Bland, MBA
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