(TY) S-T Failure From Range Extreme Threatens T-Note Bull, Defines 130.09 (1.97%) Next Key Pivot

Technicals, December 22, 2011; 7:25am

In Tue's Technical Webcast we discussed the short-term bearish divergence in momentum as well as the point that this mo failure was of a scale insufficient to conclude a broader peak/reversal threat. Indeed, with the 240-min chart below showing that this week's setback has thus far held a Fibonacci minimum 38.2% retrace of Dec's rally from 128.20 to 131.14, this week's sell-off attempt arguably remains within the bounds of a smaller-degree (4th-Wave) correction within an ongoing wave sequence higher. Should the market weaken further however, below yesterday's 130.09 low and above a 1.97% yield, the combination of an admittedly short-term momentum failure and the rejection of the extreme upper recesses of the past quarter's range could easily expose a move south that could be surprisingly steep and perhaps similar to Sep-Oct's plunge.

The daily chart above shows the market's rejection thus far of the extreme upper recesses of the past quarter's range, but clearly more significant proof than a short-term mo failure is needed to conclude a larger-degree relapse. And we believe such further evidence will come in the form of a failed, labored recovery attempt from yesterday's 130.09 low and a relapse below 130.09 that will expose at least the intermediate-term trend as down.

Contributing to this peak/reversal threat in T-Note futures prices is the extent to which 10-yr rates have popped this week. With Dec's resumed rate slide from a 2.09% high spanning a length within one basis point of the 0.618 progression of Nov's preceding 2.40% - 1.88% drop and the market's failure to then sustain losses below 23-Nov's former 1.88% support-turned-resistance, it's entirely possible that the entire 27-Oct-to-19-Dec rate drop is a complete 3-wave (B- or 2^nd-Wave) retest of 22-Sep's 1.72% low and that the market is prepping for another impulsive Sep/Oct-type (C- or 3^rd-Wave) rise in rates and decline in futures prices. And in this regard, we believe 08-Dec's 1.97% rate low and former support-turned-resistance is analogous to yesterday's 130.09 low basis the Mar futures, where a break above this rate and below this futures prices will be the next reinforcing step to a broader peak/reversal environment in 10-yr prices.

On a very long-term basis shown in the weekly chart below, the jury remains out (and may be out for a long time) on whether the past quarter's lateral, choppy price action is part of a major peak/reversal process or merely consolidative ahead of an eventual resumption of this year's earlier advance. But if the Mar futures market weakens below 130.09, we believe the odds will increase for at least another intra-range relapse that could surprise in terms of scope and sharpness.

These issues considered, traders are advised to move to a neutral/sideline policy and first approach any near-term pop to the 131.00-area as a corrective selling opportunity. Strength above Mon's 131.14 high is required to negate this call while a relapse below yesterday's 130.09 low will reinforce it and expose further and possibly accelerated losses thereafter.