Fixed Income Markets, Technicals

How Far Will Treasuries, Bunds and JGBs Retrace?

It has been a choppy reversal; but with last week’s close, the T-note’s bullish inclinations have been confirmed. The 12.7 percent drop in from December’s highs to June’s lows, however, has produced significant resistance that can sideline rallies going forward. The immediate concern for an ongoing advance is momentum. A look at the daily chart for the past three active trading sessions shows a clear development in congestion (though this consolidation pattern is still backed by a very steady rising trend and is developing into an ascending wedge pattern). There is a Fib confluence immediately overhead that could offset the fledgling bull trend for the first time since June 22nd or provide momentum with short-term breakout follow through. A 38.2% retracement of the 3/19 to 6/22 decline and 61.8% pullback of the 5/14 to 6/22 accelerated tumble hold at 119-02/04.

After consolidating around a support line drawn off of the June 2007 and October 2008 lows, the 10 year note has rallied, signaling what may be the next bout of deflationary pressures.  A rally above 121.025 would create overlap with the decline from the top and suggest that the decline was corrective.  A new high would then be favored.  Until then it is possible that the 10 year drop below 114.080 in order to complete an impulse (5 waves).

The benchmark 10-year Gilt has clearly stalled in its bear trend from March. In the process of developing congestion over the past month, the market has developed a notable triple bottom around 116.50 (a progression from a swing low back in early February). This floor is surprisingly clear, especially given the choppy nature of resistance. There is certainly a consistent trend of lower swing highs since the March peak; but there is no easy trendline to develop from this progression. Instead, we will have to watch for any rallies that overtake important highs. The next level to watch above is 119.65. However, the bias is clearly bearish within this broad triangle; so our primary concern is 116.50 support.

Gilt wave structure is clear.  There are 3 waves complete at the 2008 high.  An unorthodox top was made in 2009 in what is probably wave b of an expanded flat.  If indeed wave iv is a flat, then the correction is in its latter stages, if not already complete at 116.05.  Elliott channel support defends the low.  A rally is expected.

With last week’s close, bunds have overtaken resistance at 121.50 and extended momentum to a fifth consecutive weekly advance. This rally is as steady as the advance during the worst of the credit crisis back in October/November of last year; yet it is not as aggressive. On the one hand, the reserved pace can fend off expectations of an equally sharp reversal. However, until confirmed, this advance may merely be a correction in a true bear trend. In trying to take stock of the larger trend, we will need to gauge the follow through in the current move and/or measure the extent of the next bearish reversal. Though it provide little stopping power on the way up, immediate support is seen at 121.50 and resistance taken in two levels: 122.50 and 123.50.

The Bund has rallied through 121.55, creating overlap with the decline from the 2008 top and in turn suggesting that the decline is a correction and the larger degree trend remains up.  Support begins at 120.76.

No other trend can claim to be as steady as the 10-year JGB’s advance from early June. We are currently working on the first four week advance since March of 2008. However, we may not close the fourth week in the green. The consistency of this advance as seen on the daily chart has developed a very clear trendline. However, after overrunning 136.75 and 137.25; resistance will grow much more oppressive around 139.00/40. This bottom of this zone is the top of congestion from February to March and the latter figure is the high for one of the market’s most volatile periods in years. We will watch for a break of 139 or below 138.50 for signs as to the next leg of the trend.

Commentary has not changed in months…”a 11 year head and shoulders top may be in the works and 142 should remain intact (if the pattern is to play out) as the right shoulder of the formation.  A break below the neckline would likely see a breakdown that carries into long term support levels of 122.50 and 116.41/117.20.”  It is possible that 140.16 is exceeded in order to complete a corrective advance from the 2008 low.

Written by: John Kicklighter and Jamie Saettele, Strategists for CFDTrading.com
Questions? Comments? You can send them to jkicklighter@cfdtrading.com