Getting Near Upside Extensions

Stocks are nearing price extensions – S&P 500 ($SPX and ES H1-D). They may or may not make it to these price levels. I continue to get more technical and have fewer opinions. Targets were hit on the daily chart, so a pause or pullback in price was expected. So far, it has only been a pause. We’ll see how the rest of the week plays itself out.





The NASDAQ 100 (NQ H1-D) has also hit price extensions and has now paused. Key support for the recent rally is 2,195.75 It needs to hold, or a deeper correction should be expected.





Gold (GC G1-D) has key support at the recent low near 1,369. Short term support is in the 1,383 range on the hourly chart. If that breaks, there is not much support for a while.



To go with Gold, the US Dollar (DX H1-D) has hit what looks to be meaningful support. A rally in the Dollar has been bad for risky assets and has been driven by falling Bond Prices / rising Bond Yields.

Bonds Take Out Key Support

Bonds continue to crash. The setup was there for a potential low and it triggered and failed. Support that was broken today was pretty critical. Next support on the 30-year US Treasury (ZB H1-D) is now 117’22 and 117’01. You can see that the 121 level held for a few days, but it proved to only be a pause on the way lower.



Here is a longer term chart of the 30-year Treasury ($USB). You can see that it has reversed the breakout above 124 from last summer. Next support is in the 117 but a test of low of the trading range (near 114) seems very probably.



The selloff in bonds has not been limited to Treasuries. You can see that National Municipal Bonds (MUB) are in a full blow crash, as are California Municipal Bonds (MUC). This should be no surprise, as I have been writing about the crash in these bonds for several months now.



The flip side of the bond market crash is that by definition, Interest Rates are exploding higher! Shorter-term rates on US Treasuries have doubled in about a month. They still have a ways to go to get back to the highs of the year, but the yields are already much more compelling.



Long-term Treasury Yields have all gone up over 1% in the last month or two. A crash in the 30-year Treasury to this year’s low would drive the 30-year Treasury Yield into the 4.8% range.



Bond prices can reverse up at any time, but the next high probability setup would be at or about the 117 price level next week.

Potential for a Bounce in Bonds

Bonds continue to implode (yields keep rocketing higher). Bonds keep breaking through support level after support level. You can see that timing comes in early next week (pink bars on the 30-year US Treasury ZB H1-D) and today is day 46 of the crash (crashes often reverse around days 45-49), so a bounce or bottom should not be a surprise.



I have included charts for US Treasuries of different maturities IEI (3-7 year), IEF (7-10) and TLT (20-year), as well as the Inflation-adjusted US Treasury (TIP). You can see that they have fallen to or below the key 200-day moving average. This is a level at which institutional investors tend to defend price.





The Investment Grade Corporate Bond index (LQD), the Aggregate Bond Index (AGG) and the Preferred Stock ETF (PFD) have also fallen to support.



Municipal Bonds (MUB), California Municipal Bonds (MUC) and Build America Bonds (BAB) are now testing the lows hit last month



Many are now saying that the Build America Bond program extension was not included in the new Tax Cut Proposal, because the Republicans want to make the big economic debate in 2011 centered around whether or not the US should bail out bankrupt states and their union workers. I still think that the plan will be extended. You can see the consequences to the Bond Market if it doesn’t.

http://blogs.reuters.com/james-pethokoukis/2010/12/07/secret-gop-plan-push-states-to-declare-bankruptcy-and-smash-unions/

Let’s see if bonds can put in a low over the next week or so. It may be a low over some serious consequence.

The Power of Timing

I know some of this stuff seems like voodoo, but when computers are doing a significant majority of all trading, you need to use their rules when making decisions. One of the tools they are clearly using is cycle timing. This week, the Euro had several key time cycle dates on Wednesday and Thursday.

I wrote the following earlier this week –

“The Euro (6E Z0-D) has been hit very hard this month. Timing comes in Wednesday and Thursday this week, with the next support level not far below current price. Price does not have to reverse here, but I will be on alert, because this market has traded so technically this year.”

The Euro and risky assets reversed violently!



The S&P 500 (ES Z0-D) also had timing this week (pink bars below price) and has gone vertical after holding support on several occasions in the 1,170 range. The recent uptrend saw a decent correction that lasted a month, and the market is now back in rally mode.

IBD still shows “Market in Correction”, because there was not enough volume on Thursday to declare a “Follow Through Day”, but leadership is working and there has been plenty of Follow Through (significant accumulation by Institutional investors) in Gold, Oil, industrials and Transportation.

The next key resistance level is 1,239 and the longer term critical levels are around 1,263 and 1,300. If we hit those levels with longer-term timing, you know what I will be doing…



Crude Oil (CL F1-D) held support, with timing last week. That got me into Oil early. You can see the reversal pattern set up in Crude and the next potential resistance levels. The old adage is that stocks that go to $90 eventually go to $100. It will be interesting to see how Crude reacts if it gets to $91. Now I look for potential resistance levels and will make decisions if prices get to these levels.



The 30-year US Treasury (ZB H1-D) is in freefall. November was a rout for Municipal, Corporate and Treasury Bonds. Significant support is in the 122 range. I think that will translate to about $93 on the 20-year Treasury ETF (TLT). I will be looking for a potential reversal soon out of Treasuries. The key to the rally has been a selloff in the US Dollar. When it reverses back up, I expect Bond prices to also reverse back up. December should be yet another crazy month.



Gold had timing today and was at resistance for much of the morning at $1,405. It eventually blasted through this area and closed the day at $1,414.80! I am assuming that there were some shorts anticipating a reversal at $1,406 and they are now in the process of covering their shorts (buying). Next resistance is $1,452. Let’s see if prices can work their way up there. Next timing is next Friday.



Now I look to add on weak, low-volume pullbacks into obvious support. Like how Financials (XLF) pulled back into the old resistance level at $15.00 this morning. The breakout in November failed. Sometimes the second mouse gets the cheese…

50-day Held Today

The markets took a nasty turn lower on November 4th. They are now at a logical level for support. Both the S&P 500 ($SPX) and the Dow Jones ($INDU) held their 50-day moving averages today (Black Lines). This is a normal level to expect the indexes to be defended and today did not disappoint.



You can see how persistent the selloff has been, both in US and Foreign markets. Financials (XLF), Hoe Builders (XHB) and Insurance (KIE) all stopped going down today. You can see how quickly these sectors have reversed up after selloffs have stopped over the past 6 months. We’ll see if it can happen yet again.



International markets have been hit pretty hard since the beginning of November. Developed International Economies (EFA), China (FXI) and India (IFN) have each broken their 50-day averages (not shown).



The Euro (6E Z0-D) has been hit very hard this month. Timing comes in Wednesday and Thursday this week, with the next support level not far below current price. Price does not have to reverse here, but I will be on alert, because this market has traded so technically this year.



The S&P 500 (ES Z0-D) is sitting right above significant support, with timing coming in tomorrow and Wednesday. Be alert for a reversal or a significant failure this week.



While many areas have been failing, there has been some leadership. Just note that more and more areas are failing, so you will have to be more and more selective when committing money. Metals/Mining (XME), Transportation (IYT) and Silver (SLV) have been holding up very well. They have not yet broken out, though.



Some leading names in Materials are SNP, BHP and RIO. Note how all three held their 50-day averages today.



Crude Oil held support and bounced sharply the last few days. Several Energy names have been holding well above their 50-day averages – BTU, APC and LINE. Again, none have broken out yet, but they are worth monitoring.



This has also been a rough month for Bonds. Junk Bonds (JNK), Municipal Bonds (MUB) and Emerging Market Bonds (PCY) have been hit hard, considering they are bond and not stock ETFs. Continue to expect violent swings up and down as asset classes fall into and out of favor.



The markets need to hold support here and at least bounce over the next few days. If you start to see the S&P 500 and the Dow break key support, then this selloff can accelerate quickly. This will be a very important week.

Daily Uptrends Broken

The uptrend has been broken. You can see that the uptrend failed when the support levels around 1,200 were broken on the S&P 500 (ES Z0-D). The 34-day moving average held price today, but below that, meaningful support does not show up until 1,150 and 1,134. 1,134 would be similar to the August selloff.

None of these areas have to hold and price can reverse back up from anywhere, but this market has been very technical in how it has traded, so I will be watching for reversals from anticipated levels.

Here is the hourly S&P 500 (ES Z0-60 min) chart. On it, you can see that there is a ton of resistance above the current price. There was timing on the hourly chart for a reversal up yesterday, but the bounce has been very weak. Weak bounces into resistance, in a downtrend are normally not a bullish setup…



The Dow (YM Z0-D) has broken its uptrend and I have listed potential support levels.



The NASDAQ 100 (NQ Z0-D) has broken its uptrend and has already fallen to support.



I hope you were patient if you wanted to buy Gold (GC Z0-D). You can see that its uptrend is also broken and meaningful support comes in around 1,313 – 1,305.



The 120 minute chart on Gold (GC Z0-120min) is the same story as the S&P 500. There is substantial resistance above price here, and the trend is down for now.



The Euro (6E Z0-D) looks similar to Gold. The Euro has pretty meaningful support in here and had better hold, or it is going to make a serious retracement of the recent rally.



The 30-year US Treasury (ZB Z0-D0) has been massacred over the past couple weeks. It finally found support at the 168% extension zone and bounced hard up into resistance. The Treasury normally benefits as a safe haven trade during times of fear, so there may be money flowing out of Municipals and into Treasuries. Or it may simply be bouncing during a downtrend. We’ll see how it reacts at resistance.



All in all, risky markets broke their uptrends and are now correcting. Some are at or near daily support, and most are at hourly resistance. There is a lot of concern about Municipal Bonds being allowed to default be a Republican Congress (California, Harrisburg, Hamtramck) and the potential defaults by Ireland, Greece and Portugal. All the while, the Commodities exchanges are increasing margin requirements on risky assets. This should continue to be an interesting week. Watch the hourly charts for turns in the daily patterns.

Municipal Bonds Continue to Get Hammered

Municipal Bonds have been annihilated the past 7 trading days. The pain was particularly bad today. I have stated on several occasions that the Republican takeover of Congress will not lead to the “blessed gridlock” of the Clinton years. The new Republican Congress will have no inclination to continue Obama’s mission of bailing out the Unions with taxpayer money.

The key beneficiaries of this money were the states, who were given several $100 billion so that they would not have to make layoffs - the vast majority of these potential layoffs being union jobs. If this money dries up, the states will be forced to make difficult fiscal decisions, like layoffs and cutting payments to municipalities. The markets are now starting to price in potential defaults in municipal bonds.

It turns out that the politicians in California lied about how bad its finances were, just a few weeks before the election. Now the real numbers are coming out and California is about $25 billion deeper in debt than was admitted in September (can we please throw these politicians in jail already!). This risk is being priced into California municipal bonds.

I know that it is written into the California Constitution that the state may not default on Muni bonds, but that does not preclude small municipalities from defaulting. There is a real risk that Harrisburg, PA will default in the very near future and that is also being priced in to municipal bonds.



Take a look at how some leveraged Municipal Closed End Funds have been trading recently (PIMCO and Nuveen top the list of pain) –