Diary of a Financier

SPX & TNX Relent: Below First Supports, Looking for Seconds

In Capital Markets on Thu 23 Aug 2012 at 21:02

After noting the big developments in equities’ assault on their secular bear market last week, I followed-up with an entry discussing the secular reversal occurring in Treasuries too. By definition, these secular shifts are long-term stories, and I suggested that both SPX & interest rates were going to pullback in the short-term from overbought levels of resistance. What a difference a few days make in the modern market! That pullback is underway, so I wanted to update my thinking as to what’s next, because this should present an awesome buying opportunity—at least as my thesis is aggregated right now.

SPY closed tonight below its 1st support ~$141.30—a trendline of the short-term rising wedge that’s guided me for weeks. This was to be expected, per the 2011 analogue. I doubt it surpasses that support-cum-resistance tomorrow, so we’re looking onward & downward to subsequent support levels, as mentioned previously:

  1. >$138.50 second support- bull channel alternate (yellow dotted)
  2. >$137.50 third support- bull channel & ~50DMA (yellow)

SPY daily- below 1st support trendline of ST rising wedge; analogous development to 3/2012 pullback from overbought condition, so watch for subsequent support levels.

Treasury yields have also fallen in lockstep with SPX. 10y yields (TNX) are below their first support ~1.690. They might snag on the 50DMA ~1.590, but watch for these subsequent support levels:

  1. 1.440 second support (red)
  2. 1.400 third support (red bold)

TNX daily- below 1st support ~16.90; expect a pause in the slide at 50DMA ~15.90

For me, a potentially serious risk is manifest in the weekly SPY chart, where bear divergence is underway. To maintain its progress toward slaying the bear, SPY must hold the crucial support levels mentioned above.

Like I said, the fundamentals & technicals persuade me toward the bull case right now. Again, all fractals are overbought, so this pullback is garden-variety. I expect the SPX:TNX correlation to skip higher until September, as low ytd correlation¹ (-0.2) has displayed the safety trade flight from international markets (i.e. Eurocrisis) juxtaposed against US domestic strength. For the coming weeks, that relationship should recouple.

–Romeo

¹SPX:TNX correlation- rolling 50-week, weekly calculation.

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