(TY) T-Note Relapse Reinforces Peak/Reversal Threat, Still-Positive View on S&Ps, Crude

Technicals
August 14, 2012; 8:20am

SEP T-NOTES
Overnight's relapse from a 133.275 area and 38.2% retrace of the Sep T-Note market's latest break from 134.295 to 133.05 detailed in the 240-min chart reinforces our broader bearish count that contends this market is still in the relatively early stages of a correction or reversal lower that could be major in scope. As a result of overnight and this morning's weakness, shorter-term traders with tighter risk profiles are advised to use 133.28 as the new short-term parameter from which to manage the risk of an advised bearish policy.

Our call for a more significant correction or reversal lower is based on three technical facts:

• 27-Jul's confirmed bearish divergence in momentum that breaks the major uptrend and defines 25-Jul's 135.155 high as
• the completion of a (textbook) 5-wave Elliott Wave pattern from 20-Mar's 127.23 low amidst
• historically extreme levels of bullish sentiment that have warned of an accompanied major peak/reversal threats in the past.

As a result of early-Aug's resumption of late-Jul's initial counter-trend break shown in the daily chart above, the market has defined 02-Aug's 134.30 high as THE high and longer-term risk parameter this market is now obligated to recoup to render the sell-off attempt from 135.155 a 3-wave and thus corrective affair consistent with a major bullish count. In lieu of strength above at least 133.28 and preferably 134.30, the new trend is, in fact, down and should not surprise by its (3^rd-Wave) continuance or acceleration.

The 133.00-area basis the prompt futures contract shown in the daily active-continuation chart above defines the next key downside threshold for this market, the break of which would reinforce this bearish count and could expose sharp losses thereafter. This 133.00-area is perhaps more refined and defined by 22-Jun's 1.674% yield level and the 1.71% 38.2% retrace of this year's entire 2.38% - 1.39% drop in rates shown in the daily log close-only chart of actual 10-yr yields below.

The weekly chart of the T-Note futures below clearly shows waning upside momentum on a major scale along with the recent and historically frothy levels of the Bullish Consensus (www.marketvane.net) measure of market sentiment that have accompanied virtually all major peak/reversal environments for this market. Combined with the market's proof of weakness and vulnerability over the past few weeks that have produced two key and objective parameters at 133.28 (tight) and 134.30 from which the risk of an advised bearish policy can now be effectively and objectively managed, we believe this waning upside momentum on a weekly scale along with extreme levels of bullish sentiment warns of not only lower prices ahead, but potentially losses that will surprise the global-macro establishment given the preponderance of bearish evidence that is widely known.

In sum, a bearish policy remains advised with strength above 133.28 required to defer this view and warrant shorter-term traders with tighter risk profiles to move to a neutral/sideline position. Strength above 134.30 is likewise required to threaten this view on a broader scale needed to warrant a similar defensive move by longer-term players. In lieu of such strength, further and possibly steep losses are expected.

SEP E-MINI S&PS
The 240-min chart below shows the market's strength overnight that remains consistent with continued upward pressure on interest rates and downward pressure on T-Note prices that one would expect from an economy that is growing. As a direct result of this latest spate of S&P strength, the market has defined 08-Aug's 1390 low as the latest corrective low and absolute tightest risk parameter it is now minimally required to fail below to confirm a bearish divergence in short-term momentum and expose at least an interim correction lower. In lieu of at least such sub-1390 weakness, the trend is up and should not surprise by its continuance or acceleration.

This admittedly tight but objective risk parameter at 1390 could come in quite handy given the market's precarious position at the extreme upper recesses of this year's range shown in the daily log scale chart below. Clearly, such a minor momentum failure below a level like 1390 would be grossly insufficient to break the clear and present and longer-term uptrend. Indeed, to break this current bull, a failure below 02-Aug's 1349 larger-degree corrective low is needed. But for traders of a personal risk profile that prohibits such a larger amount of risk, and given that we see no technical levels of any merit between 1390 and 1349, paring or neutralizing bullish exposure on a failure below 1390 is advised.

In sum, a bullish policy remains advised with a failure below 1390 required to warrant moving to a neutral/sideline position for shorter-term traders with tighter risk profiles. To mitigate a broader bullish count however, this market needs to break 1349. And until or unless the market proves weakness below at least 1390 and preferably 1349, further and possibly surprising gains (above Mar's 1420 high) are expected.

SEP CRUDE OIL
The daily close-only chart below shows the market's return to the exact middle (i.e. 50% retrace) of this year's entire decline from 24-Feb's 109.77 high daily close to 28-Jun's 77.69 low close. And while we want to be aware of this Fibonacci relationship, traders are reminded that such merely derived technical levels like Fibs, various "bands", trend lines, and the always-useless moving averages never have nor ever will prove themselves to be reliable reasons for bucking a trend without an accompanying momentum divergence needed to break the trend.

On the broader daily-close chart above, the trend remains arguably up as long as it remains above 02-Aug's 87.13 corrective low. Additionally and on the heels of early-Aug's resumption of the Jun-Jul rally detailed in the 240-min chart below, the past few days' mere lateral chop is arguably corrective/consolidative and consistent with a still-bullish count calling for new highs above 94.72. And given the generally positive correlation between crude oil prices and equities, this bullish call on crude oil would seem to reinforce our bullish call on stocks and, by extension, a bearish call on T-notes.

As a result of the recent lateral range trade, traders are advised to use Fri's 91.71 lower boundary to this range as a tight but objective risk parameter to a still-advised bullish policy and exposure ahead of a resumption of the Jun-Aug recovery to new highs above 94.72.