Tuesday Technical Review: Credit

Today’s Market Recap is more about credit because I believe that is where things are heating up. That is where capital is flowing to as equity still looks tired and in a slightly unorganized state. The headlines may say equity sold off at the open because of a Chicago PMI and Consumer Sentiment miss but I would disagree.

I do have one equity chart though and that is of the mid cap futures which has struggled to take out a key level that has acted as support and or resistance for one year now.

Treasury

The entire US Treasury curve looks to have broken out to all time highs and has done so with decent volume further confirming the move. The 30 year has broken out of resistance but technically still below prior all time highs but looks very strong.

Today was confirmation of the move as the 5 and 10 year both came back to prior highs, successfully backtested and moved higher. The 2 year has been above prior highs for five days now as the rest of the curve caught up. Below are six month daily charts of various maturities (please note these charts were printed at 3:30 EST before the close).

2 Year Futures

5 Year Futures

10 Year Futures

30 Year Futures

10 Year Yield (TNX)

Vix

The descending wedge on the vix is getting very close to resolving itself either way. Odds favor a break higher based purely on the chart pattern. After six months of consolidation the move whichever way should be pretty big.

Currencies

The AUD does look strong still here which is negative for the bearish equity trade, no question about it although today’s daily candle was a nice possible reversal sign. The EUR and USD are both sitting right at levels that if taken out should set up a nice move lower (EUR) and higher (DXY). Below is a EUR/USD chart highlighting the importance of the 1.3080-.3090 area.

Bottom Line

US Treasuries are very bullish right now and they still have not even seen any “fear trade” yet. Further strength in UST I firmly believe will not only cap future equity gains but lead to a sharp move lower in equity.

Quite possibly as was the case in late July when UST broke out to then all time highs the divergence between SPX and UST was filled in days, not weeks. Current SPX fair value based solely on UST is around 1,100. I do think that gap can be filled and filled fast if UST continues its bullish pattern. The 10 year yield for example sits just 10 bp above the October lows when the SPX traded below 1,100.

Credit continues to signal pending problems in the capital markets. Today’s announcement by the Greek government of an emergency parliament meeting (Greece Calls Crisis Meeting) could very well be the headline the markets appear to be pricing in.

Images: Flickr (licence attribution)

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