(TY) Peak/Reversal Threat Continues to Build in 10-Yr T-Notes, But Beware Interim Pop

Technicals, February 21, 2012; 9:30am

While the past few days' break below 09-Feb's 130.18 low contributes to a peak and reversal threat that could be major in scope, traders are advised to beware an interim corrective recovery within the broader peak/reversal process if the market cannot sustain recent short-term losses below Fri's 130.315 minor corrective high detailed in the 240-min chart below. Such short-term strength will confirm a bullish divergence in momentum that will end the latest phase of the developing decline from 15-Feb's 131.245 high and expose at least an interim correction higher. But given the scope of the secular bull trend, another round of new all-time highs cannot be ruled out. Per this short-term development, our recommendation in Thur's Trading Strategy Blog to establish shorts at 131.06 is cancelled.

The daily chart below shows the prospective break of the broader uptrend from 27-Oct's 127.06 low that contributes to a major peak/reversal threat for reasons we'll discuss below, not the least of which is the market's gross failure to sustain 131-3/4+ "breakout" gains. But again, given the scope of the secular advance, this month's sell-off attempt may be nothing more than a mid-Jan-type head-fake, so obviously more evidence of a new downtrend is needed to reaffirm a broader peak/reversal threat. And this evidence comes in the form of continued trendy, impulsive behavior on breaks and labored, 3-wave, corrective behavior on recovery attempts.

As a direct result of the past week's break, the market has defined 15-Feb's 131.25 high as THE high and risk parameter this market now needs to recoup to render Feb's sell-off attempt a 3-wave and thus corrective structure consistent with the major bull trend ahead of another round of new all-time highs above 132.11. While the market sustains levels below 131.25, we believe odds have shifted towards a larger-degree (i.e. C-Wave) correction OR a major (3^rd-Wave) reversal lower.

The long-term peak/reversal threats to this market stem directly from the unique combination of waning upside momentum on a major, weekly scale amidst historically high levels of bullish sentiment. The weekly chart below shows these two technical facts as well as the Nov'10 major peak/reversal environment the last time this combination occurred.

From a yield perspective, the daily log close-only chart still shows the market below 24-Jan's pivotal 2.06% high, the break of which is required to confirm 31-Jan's 1.79% low as the end of the slide in rates from 27-Oct's 2.40% high and the start of a larger-degree correction or reversal higher in rates.

Also contributing to a case calling for higher 10-yr rates and lower 10-yr T-Note futures prices is the prospect for a "double-bottom" reversal pattern on a weekly log close-only basis below from the 1.82% level. The Fibonacci fact that Jan-Sep'11's 3.64% - 1.82% decline spanned a length exactly 38.2% longer than Mar-Oct'10's 3.94% - 2.39% preceding plunge would seem to reinforce this 1.82% area as a consider support condition given the past few weeks' recovery and verification.

These issues considered, a bearish policy remains advised with strength above 131.00 required to defer this view in favor of an interim corrective pop and a recovery above 131.25 required to threaten it enough to warrant moving back to a neutral/sideline policy. In lieu of such strength, further and possibly extreme, long-term losses are expected. And such upward pressure on interest rates could be a welcomed sight for equity bulls as this could be a sign of more sustainable economic growth.

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