Filed under: Trader Dan Norcini
Dear Friends,
After the close of pit session trading in New York, several of the commodity markets began to slip lower in their electronic trading session. The culprit was the following chart action as evidenced by the daily price action of the US long bond.
It smashed through the floor of support that had been established last week as if it was non-existent. The reason – bond traders began having second thoughts about the extent of the Federal Reserve’s Quantitative Easing purchases and the duration of that program on account of the strong wave of criticism that has been unleashed against the Fed for pursuing what more and more people are becoming convinced is wrongheaded and ultimately fraught with serious long term implications towards the health of the US Dollar. It seems as if a growing majority are more concerned with the inflation that this sort of money creation is going to create than with any potential effect it might have on the US employment situation.
That had traders and hedge funds pulling money out of various risk trades and left individual commodity markets exposed to another round of algorithm related selling as the US dollar began gathering late session strength against its fellows.
Even those markets with extremely strong fundamentals such as corn and soybeans saw some late-in-the-session selling which took them off their best levels of the day. Corn, which had been limit down on Friday during the first avalanche of selling tied to talk of Chinese rate hikes, had nicely recovered and totally erased the entirety of those losses by moving more than 30 cents to the upside as the limits had been expanded by CME Group to 45 cents. When the bonds began to break down, corn surrendered some of those strong gains as even in that pit there was evidence of computer-based selling pressure.
Silver was knocked lower into what is a strong support zone on the charts that extends from 25.50 down towards 25. The 25 level is very substantial so if the big Asian buyers do not show up near that level as we expect them to, it has the possibility of moving down to near 24 where formidable buying will emerge.
Please note on the following two charts of the long bond (daily and weekly) the various markings and annotations.
The weekly chart is particularly important as it gives us the longer term trend. You will note that the bonds have not been able to accomplish a single weekly close above the 75% retracement level from the late 2008 high and the mid 2009 low. The market spiked through that level but failed to hold the close over it. It has then moved back down after failing there where it initially found some support at the 61.8% retracement level. That too failed when it broke down last week. If it was going to hold, we would expect to see it then encounter buying near the critical 50% retracement level that comes in near 126^25.
That level failed as well today after holding there earlier in the session. If the bond market does not climb back above this level by the end of trading this Friday, it is likely that they will fall down towards 123.
I find this quite remarkable chart action because of its implications. The Fed is incurring great displeasure from more than a few quarters over its latest announcement for QE2. That process is deliberately designed to affect longer term interest rates by keeping them artificially lower. What is now happening is the action in the bond market is actually witnessing those same long term interest rates moving HIGHER. I am reading this price action as a vote of NO CONFIDENCE by the market in this next round of QE2. It is as if the collective market has said to the Fed:
“You are not going to reduce unemployment and get the US economy moving forward with this policy. The only thing you are going to be doing is to unleash a wave of inflation”.
If that is indeed the case, we have reached an important crossroads for what is the Fed now supposed to do? If they do nothing, the stock market could very well fall out of bed which would work to kill consumer confidence and put consumers into a funk and a potential buyer’s strike. That is the last thing they want because the main reason behind the program in the first place is to restore consumer confidence by having the price of paper assets move higher in a low interest rate environment which will (so the thinking goes) induce consumers to spend. That would then ignite additional borrowing which leads to some hiring and hopefully get the ball rolling on improving the employment front. If the stock market tanks – forgeddabout it!
If they move forward with the plan, bond traders are liable to use any rallies that might result from Fed purchases to unload bonds which will work to short-circuit the intended impact of each round of QE purchases. They are liable to do just that because of growing doubts about the effectiveness of this approach to cure what ails the US economy. If after the QE purchase, rates which initially moved lower then sharply reverse course and move higher, then what? If that occurs, does the Fed then double down on its buys unleashing more potential for inflationary pressures or do they back off. I honestly have no idea but all I do know at this point in time is that the market action in the long bond is very troubling and signals that we are entering a period of incredible volatility and great uncertainty in the markets.
Gold is not going to move much lower or stay down for long in such an environment.
DAN'S CHARTS:
http://jsmineset.com/wp-content/uploads/2010/11/November1510Bonds1.pdf
AND
http://jsmineset.com/wp-content/uploads/2010/11/November1510Bonds2.pdf
After the close of pit session trading in New York, several of the commodity markets began to slip lower in their electronic trading session. The culprit was the following chart action as evidenced by the daily price action of the US long bond.
It smashed through the floor of support that had been established last week as if it was non-existent. The reason – bond traders began having second thoughts about the extent of the Federal Reserve’s Quantitative Easing purchases and the duration of that program on account of the strong wave of criticism that has been unleashed against the Fed for pursuing what more and more people are becoming convinced is wrongheaded and ultimately fraught with serious long term implications towards the health of the US Dollar. It seems as if a growing majority are more concerned with the inflation that this sort of money creation is going to create than with any potential effect it might have on the US employment situation.
That had traders and hedge funds pulling money out of various risk trades and left individual commodity markets exposed to another round of algorithm related selling as the US dollar began gathering late session strength against its fellows.
Even those markets with extremely strong fundamentals such as corn and soybeans saw some late-in-the-session selling which took them off their best levels of the day. Corn, which had been limit down on Friday during the first avalanche of selling tied to talk of Chinese rate hikes, had nicely recovered and totally erased the entirety of those losses by moving more than 30 cents to the upside as the limits had been expanded by CME Group to 45 cents. When the bonds began to break down, corn surrendered some of those strong gains as even in that pit there was evidence of computer-based selling pressure.
Silver was knocked lower into what is a strong support zone on the charts that extends from 25.50 down towards 25. The 25 level is very substantial so if the big Asian buyers do not show up near that level as we expect them to, it has the possibility of moving down to near 24 where formidable buying will emerge.
Please note on the following two charts of the long bond (daily and weekly) the various markings and annotations.
The weekly chart is particularly important as it gives us the longer term trend. You will note that the bonds have not been able to accomplish a single weekly close above the 75% retracement level from the late 2008 high and the mid 2009 low. The market spiked through that level but failed to hold the close over it. It has then moved back down after failing there where it initially found some support at the 61.8% retracement level. That too failed when it broke down last week. If it was going to hold, we would expect to see it then encounter buying near the critical 50% retracement level that comes in near 126^25.
That level failed as well today after holding there earlier in the session. If the bond market does not climb back above this level by the end of trading this Friday, it is likely that they will fall down towards 123.
I find this quite remarkable chart action because of its implications. The Fed is incurring great displeasure from more than a few quarters over its latest announcement for QE2. That process is deliberately designed to affect longer term interest rates by keeping them artificially lower. What is now happening is the action in the bond market is actually witnessing those same long term interest rates moving HIGHER. I am reading this price action as a vote of NO CONFIDENCE by the market in this next round of QE2. It is as if the collective market has said to the Fed:
“You are not going to reduce unemployment and get the US economy moving forward with this policy. The only thing you are going to be doing is to unleash a wave of inflation”.
If that is indeed the case, we have reached an important crossroads for what is the Fed now supposed to do? If they do nothing, the stock market could very well fall out of bed which would work to kill consumer confidence and put consumers into a funk and a potential buyer’s strike. That is the last thing they want because the main reason behind the program in the first place is to restore consumer confidence by having the price of paper assets move higher in a low interest rate environment which will (so the thinking goes) induce consumers to spend. That would then ignite additional borrowing which leads to some hiring and hopefully get the ball rolling on improving the employment front. If the stock market tanks – forgeddabout it!
If they move forward with the plan, bond traders are liable to use any rallies that might result from Fed purchases to unload bonds which will work to short-circuit the intended impact of each round of QE purchases. They are liable to do just that because of growing doubts about the effectiveness of this approach to cure what ails the US economy. If after the QE purchase, rates which initially moved lower then sharply reverse course and move higher, then what? If that occurs, does the Fed then double down on its buys unleashing more potential for inflationary pressures or do they back off. I honestly have no idea but all I do know at this point in time is that the market action in the long bond is very troubling and signals that we are entering a period of incredible volatility and great uncertainty in the markets.
Gold is not going to move much lower or stay down for long in such an environment.
DAN'S CHARTS:
http://jsmineset.com/wp-content/uploads/2010/11/November1510Bonds1.pdf
AND
http://jsmineset.com/wp-content/uploads/2010/11/November1510Bonds2.pdf
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