Bonds do not believe this is a bull market yet...

So, now the equity rally is at a critical stage, either it makes or just dies. The equity market retreated to the spot where it should be able to rally strongly. If it doesn't materialize, the upside equity targets will start to get invalidated as the momentum will fail. The bonds are also at the double top territory or about to give upside continuation signals. The investment grade corporate bonds refused to sell and trigger their downside FLDs. On the positive side, many equity sector indices refused to fill their gaps. The energy is weakest suggesting low inflation pressures, especially the downside leader consumer discretionary is not filling its gap. We should get a bounce or rally out of the gap fill for now, however this could be the best bear market rally yet, it happens...

Let me explain further technically where the market stands...

http://stockcharts.com/c-sc/sc?s=$SPX&p=D&yr=0&mn=6&dy=0&i=p13527836019&r=5648&.png

First of all the market exhibited a stronger rally than the Feb bottom. We are over all three short term FLD lines. This was a clear upside confirmation. However, if the market fails below 1170 here, it would trigger the blue FLD line to the downside to about 1050s, this would also trigger the red FLD line down to 1010s or about new lows.

Of course, this would put us back on track for the IT targets of low 900s. The market is also turning from the trend line resistance (drawn from 1220 and 1131 highs). So, the rally is indeed at a critical stage where it was able to fake out by triggering the upside targets. Basically the market should not be declining below 1170s at this juncture or the rally fails. A further decline here will also trigger a trading range range than a strong upside too, that's below 1075 (green line while blue is above it).

So, the market must rally over 1100 over the next 1-2 sessions. This is why I wrote above the market is at a spot it can rally strongly. OEX P/C is over 2 today suggesting a strong Friday, ISE equities index is below 100 --usually a rally territory. All in all a sentiment reset is happening more or less without significant price damage so far, but the market must reverse the course here...

In the mean time, Fed knew about the coming reports until today, however the bond market remained resilient suggesting the injections were not enough. This is the biggest worry at the moment. Fed may not be able to stop the developing deflation from becoming a collapse...

Best of luck.

Edited by arbman, 15 July 2010 - 10:50 AM.

You can see some of the corporate bonds that are not rallying very well today suggesting perhaps the low yields that are about to be gone, this would reinforce the upside ideas for the equities. A rally over 1100, or even 1090s from here, is needed...

First of all the market exhibited a stronger rally than the Feb bottom. We are over all three short term FLD lines. This was a clear upside confirmation. However, if the market fails below 1170 here, it would trigger the blue FLD line to the downside to about 1050s, this would also trigger the red FLD line down to 1010s or about new lows.

Of course, this would put us back on track for the IT targets of low 900s. The market is also turning from the trend line resistance (drawn from 1220 and 1131 highs). So, the rally is indeed at a critical stage where it was able to fake out by triggering the upside targets. Basically the market should not be declining below 1170s at this juncture or the rally fails. A further decline here will also trigger a trading range range than a strong upside too, that's below 1075 (green line while blue is above it).

I presume you mean 1070.

BTW, that's my ST target for this correction (+/- 5 points). Beyond that, yes the rally could be in trouble.

Yes 1070. Actually a decline below 1075 is enough to break this rally from here, pretty severely, it is only 10 points... The market must rally from here. I actually looked at many corporate and junk bond issues, they don't look very bad, but the market must rally from here without dropping more than 10 points...

Let me explain further technically where the market stands...

http://stockcharts.com/c-sc/sc?s=$SPX&p=D&yr=0&mn=6&dy=0&i=p13527836019&r=5648&.png

First of all the market exhibited a stronger rally than the Feb bottom. We are over all three short term FLD lines. This was a clear upside confirmation. However, if the market fails below 1170 here, it would trigger the blue FLD line to the downside to about 1050s, this would also trigger the red FLD line down to 1010s or about new lows.

Of course, this would put us back on track for the IT targets of low 900s. The market is also turning from the trend line resistance (drawn from 1220 and 1131 highs). So, the rally is indeed at a critical stage where it was able to fake out by triggering the upside targets. Basically the market should not be declining below 1170s at this juncture or the rally fails. A further decline here will also trigger a trading range range than a strong upside too, that's below 1075 (green line while blue is above it).

So, the market must rally over 1100 over the next 1-2 sessions. This is why I wrote above the market is at a spot it can rally strongly. OEX P/C is over 2 today suggesting a strong Friday, ISE equities index is below 100 --usually a rally territory. All in all a sentiment reset is happening more or less without significant price damage so far, but the market must reverse the course here...

In the mean time, Fed knew about the coming reports until today, however the bond market remained resilient suggesting the injections were not enough. This is the biggest worry at the moment. Fed may not be able to stop the developing deflation from becoming a collapse...

Best of luck.

FLDs? Maybe I'm developing Alzheimers but can you tell me what FLD stands for?

Edited by CallMeIshmael, 15 July 2010 - 11:08 AM.

It is a term used by Hurst to describe a cyclical price limit. Meaning if the prices fall below these lines, you would expect the cycle to confirm to the upside or downside. The expected price advance than becomes the distance from the high or low to the point of crossing, I prefer using percentages or log space at least. FLD stands for something like 'future line of demarcation' or something like that, I AM developing Alzheimers... In the above chart the smoothed FLD lines are shown. Hurst did not have the means to such nice charting tools, so he generally used without smoothing. I prefer a bit smoothing since it makes it easier without the noise of the smaller cycles etc, however smoothing removes some of the details. I think the smoothing I used above is good enough to preserve it. Indeed, 1075 is looking like an absolute critical last level, it is also the gap. In fact, ideally the gap should not fill for the strong upside. The bonds say it is not the case and filling the gap may actually lead to rally failure. So, it is definitely a very critical juncture at these prices. The hourly equity and bond indices are o/s and o/b, respectively. So, any further push from here will trigger trending indications in the current directions... We don't just need a bounce we need a strong rally.

Edited by arbman, 15 July 2010 - 11:26 AM.

Here's another indication that Tuesday's rally was a big no-no for a further advance by the bonds market.

The short term yields rallied faster than the longer term yields. See, how the 3 mo and 5 yr yields spiking above 10 and 30 yr, building up the humped look.

http://ichart.finance.yahoo.com/z?s=^IRX&t=5d&q=&l=off&z=l&c=^FVX,^TNX,^TYX&.png
(reload if the above chart doesn't show, it will show eventually, sometimes yahoo does that)

Well, we do not have this anymore as of today and Fed can sacrifice the bonds a bit to prop up the equities, let's see whether they will act or fail to prevent the markets from slipping lower. They will definitely try though, this is their job!

Edited by arbman, 15 July 2010 - 11:40 AM.

Just thinking out loud but could it be that longer term bonds and the dollar are anticipating more qualitative easing? In other words, are bond prices on the long end front running future governement buying in an effort to push down longer term rates? US peso doesn't like something here.

Well they are easing already, it is just that not in the trillions that they have to publicly announce. But definitely, this is nothing but a prop up job. This is why I intend to sell the 10 yr bonds, I think I was early with the call, on the other hand, if they fail to inject enough, the market will crash, hence the bonds will look smart... All in all, Fed has to step in here and push it, I am sure they don't want to pay a bunch of speculators though, so they are moving in without announcing much at this juncture. Fed did say though that the growth is getting unsustainable AND the Europe is falling apart. This is enough to signal that they will weaken USD, or print. Let's see though when they will really step in, I was expecting in fall, but we had technically enough momentum to suggest that it already began, maybe it was only a crash protection... By all means, Fed has the tools for now to prop up the equities, the rates are low, USD is strong, so one should expect them to intervene...

Edited by arbman, 15 July 2010 - 12:37 PM.