Tuesday, July 6, 2010

06/07: A short-lived dead cat (?) bounce

Markets notched a most interesting session today. After tanking approximately 10 points in the final hour of trade on Friday, July 2, ahead of the July 4th market holiday, /ES futures proceeded to drill to fresh 2010 year lows on July 5th, as the U.S. holidayed. Yet, on touching most-powerful support just above 1000 (1002.75 was the overnight low), the futures market ignited on a powerful, sustained, and near-unbroken rally that lasted over 12 hours, taking /ES futures to 1025 by today's pre-market and upwards to 1038 by the mid-morning CST.

And that's where /ES ran into resistance from a robust price channel off the 180-day chart, recoiling in fear. Bears retook control, and markets came to only a few points of their intra-day low of last Friday (which was /ES = 1010.75). Here's the chart I referenced:

Of note is the performance today of the Treasuries market. In the face of rising equities during the pre-market and early market hours, Treasuries firmly held onto their recent gains. Generally, Treasuries and equities (or, more generally, risk assets) are negatively correlated; as investors' outlook improves, they buy risk assets and sell safe-haven assets, of which 10-year Treasuries are the 500-lb gorilla. And, to be clear, Treasuries can be viewed in terms of price or yield. The above statements refer to the price of Treasuries; but if speaking in terms of yield, which moves inversely to price, then Treasury bond yields and equities are positively correlated.

Two windows onto the 10-year Treasury market follow, both charts of /ZN, which are 10-Year U.S. Treasury Note Futures. First, a 90-day chart with 2-hour bars, which is at the high of its range. Second, a 9-year chart with weekly bars, showing a wide-angle perspective onto the market; note how Treasuries spiked during the worst throes of the financial crisis.


Finally, /GC, the Gold Futures contract, has been exhibiting notable price action as of late. The 3.5-month chart -- the longest intra-day period available to my current technology -- shows marked deterioration, with one important and robust price channel pierced, and another in danger of violation. Gold should see support at the $1180 level, at least during the intra-day period, but a break downward is certainly a possibility. I'm considering a short of the GLD if /GC prices at $1170 or below. Here's the chart:

Happy trading!

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