TREASURIES REMAIN LARGELY UNSCATHED BY STOCK MARKET STRENGTH -- 10-YEAR TREASURY YIELD ESTABLISHES CLEAR CONSOLIDATION -- OIL ETF BREAKS CHANNEL TRENDLINE -- INDIA SENSEX CHALLENGES CHANNEL RESISTANCE -- COMBINING WEEKLY AND DAILY CCI FOR SIGNALS
TREASURIES ARE RELATIVELY UNSCATHED BY STOCK MARKET STRENGTH... Link for todays video. In general, stocks and treasury bonds have been negatively correlated for some time. This means one goes up as the other goes down and visa versa. Even though the stock market moved sharply higher in January and broke above its October highs, the treasury bond ETFs remained at relatively high levels and did not break down. Strength in long-term treasuries can be traced to QE2, the threat of QE3 and the Feds zero interest rate policy, but I wonder how long treasuries can remain at high levels when the stock market and the economy are relatively strong. Something may need to give here. Chart 1 shows the 20+ Year T-Bond ETF (TLT) hitting resistance in October and again in December. Most recently, TLT peaked on 19-Dec, which is when the stock market bottomed. The ETF has been working its way lower within a falling flag or channel. This could be a bullish consolidation following the surge from 108 to 123. A move above the early February high would signal a continuation of this surge. Such a breakout would be bullish for treasuries, but negative for equities. Barring a breakout, the slow downtrend in TLT is positive for stocks and the October low marks next support.
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Chart 1
Chart 2 shows the 7-10 year T-Bond ETF (IEF) holding up even better than TLT. The ETF actually recorded a new 52-week high this month and remains in an uptrend, even with a strong stock market. IEF established support around 104 with lows in late December and January. A break below these lows would be bearish and target a test of the October lows. Such a move would be positive for equities. Chartists should keep a close eye on this support level because a breakdown could signal the start of a new leg up for stocks.
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Chart 2
The indicator window shows the Correlation Coefficient (IEF,SPY). IEF and SPY were negatively correlated most of the last 12 months, but the indicator pushed into positive territory twice over the last few weeks. This inverse relationship is being challenged, which leads me to believe something has to give. Either stocks give back some of their gains or IEF breaks down. The second indicator window shows IEF and SPY. Even though SPY moved sharply higher from late November to mid February, IEF is trading above 105 and above its late November high.
10-YEAR TREASURY YIELD ESTABLISHES CLEAR CONSOLIDATION... When analyzing the treasury bond ETFs, I always reinforce my findings with the interest rate charts. The 10-year Treasury Yield ($TNX) matches well with the 7-10 year T-Bond ETF, while the 30-year Treasury Yield ($TYX) hits the 20+ Year T-Bond ETF. Treasuries and interest rates move in opposite directions. Treasuries rise when rates fall and treasuries fall when rates rise. Chart 3 shows the 10-year Treasury Yield within a consolidation since late December and I am watching these boundaries for a confirming signal. A break above 21 (2.1%) would signal higher rates and this would be bearish for treasuries. Conversely, a break below 18 would signal lower rates and this would be bullish for treasuries. Chart 4 shows the 30-year Treasury Yield ($TYX) for reference.
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Chart 3
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Chart 4
OIL CHALLENGES CHANNEL RESISTANCE... The price of oil can also influence treasuries. An increase in oil prices increases the chances of inflation, while a decrease in oil prices decreases the chances of inflation. Chart 5 shows the US Oil Fund (USO) breaking the channel trendline with a 1% move today. Even though USO has yet to clear its late January high at 39, this trendline break is the first clue that the October-November advance may be about to continue. Over the last three months, a continuation inverse head-and-shoulders pattern is taking shape with resistance at 40. A break above this level would also be bullish.
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Chart 5
The indicator window shows the Correlation Coefficient (USO,TLT). The indicator edged into positive territory a few times the last six months, but oil and treasuries have been negatively correlated for the most part. This means an upside breakout in oil would be negative for treasuries. Note that the Producer Price Index (PPI) will be reported on Thursday and the Consumer Price Index (CPI) on Friday. Chart 6 shows Spot Light Crude ($WTIC) breaking out in late October and holding this breakout.
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Chart 6
INDIA SENSEX CHALLENGES CHANNEL RESISTANCE... The India Sensex Index ($BSE) surged over the last five weeks to challenge a falling channel that has been in place since November 2010. Chart 7 shows the Sensex surging over 150% from March 2009 until October 2010. This exceptionally strong move created an overbought situation that needed to be rectified with a correction. The current decline has done the trick with a 38-50% retracement of the prior advance. Also notice that the lows in October 2009 and 2010 mark a support zone in the 15000-16000 area. With a surge off this support zone, the index broke the channel trendline and challenged resistance from the October high. Follow through above this high would complete the trend reversal. Chartists should keep an eye on the Sensex because it is a key emerging market.
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Chart 7
The indicator window shows the 20-week Commodity Channel Index (CCI) surging above 100 for the first time since November 2010. While some consider surges above 100 to denote overbought conditions, I would suggest that this surge is a show of strength. The blue dotted lines shows surges above +100 (overbought) and below -100 (oversold). Except for the whipsaw in early 2010, these surges marked the start of significant trends. Also notice how CCI broke a clear resistance level in March 2009 and again in February 2012. This CCI breakout signals an upthrust in bullish momentum. Combined with the channel breakout, it looks like the 15 month downtrend in the Sensex is reversing.
COMBINING WEEKLY AND DAILY CCI FOR SIGNALS... Chart 8 shows daily bars for a more granular view of the Senex. Assume for a momentum that the index is in the midst of a long-term trend reversal on the weekly chart. Such an assumption would favor long positions on a shorter timeframe because they are in harmony with developments in the bigger trend. However, the index is quite overbought after a sharp seven-week advance and resistance is nigh. Notice that broken support and the October-November highs mark resistance in the 17750 area. Now what? Prudent traders or investors would wait for a pullback for a better risk-reward ratio.
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Chart 8
With CCI bullish on the weekly chart, we can now use CCI on the daily chart for timing. A move below -100 would create an oversold condition and indicate some sort of pullback or correction. A subsequent surge back above the centerline (zero) would signal that prices were turning back up and could be used to turn reversals on the daily chart. In a nutshell, chartists can use weekly CCI to dictate the trading bias and daily CCI to identify lower risk entry points. This technique can be applied to ETF, stocks or other indices.
