US Treasuries and the S&P500.

I don’t believe this market is going to come to a specific level and reverse giving an all clear signal to go short and or exit longs. The basis for that statement is in late July 2011 the market experienced a minor pullback off no major technical level that quickly turned into a major decline of 220 SPX points in less than two weeks.

The one signal that was given in July as is being given now is that of price action in the US Treasuries (UST). The equity market began slowly selling off while at the same time UST began slowly breaking out of a bull flag pattern. The two were needed in tandem I believe for UST needed the added capital flow that an equity selloff offered to break out.

Right now UST is at a very similar period as that which preceded the July 2011 selloff. The two year is right at all time highs while the five year is at a five month high and less than 0.3% from an all time high. The rest of the curve, the ten and thirty year are not far behind. All of these moves were supported by very heavy volume on Wednesday.

While UST were breaking out so was equity on Wednesday. The two put in rather strong moves both in tandem. Something which should not happen. What was interesting was Wednesday’s SPY volume was above average in a period that has been at multi year lows and similar to holiday volume.

The following chart highlights the SPY price action and volume profile on Tuesday and Wednesday as compared to that of late July. The volume jump on Wednesday supported that “capitulation” type feel equity had on the session. Watch the treasury futures.

Images: Flickr (licence attribution)

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