After a somewhat volatile trading week, equities went out with a bang on the back of Friday's monthly employment data. And while the E-Mini S&P 500 futures (Es) are back to within spitting distance of new life-of-contract highs, it's bonds, not equities that I want to begin with.
For a while now I've opined bullishly on the monthly chart of 30-year Treasury yields thanks to the January 2015 rejection of sub-2.5% interest rates. But because trading in one timeframe while performing one's analysis on a completely different timeframe can lead to both frustration and losses, great care must be taken and flexibility maintained.
30-Year Treasury Bills -- Weekly and Monthly
Source: eSignal
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My view of bonds continues to skew bearish on a higher timeframe. But on a shorter timeframe, sometimes the rubber band gets sufficiently stretched that we need to take a step back and allow mean reversion to play out. Last week's oversold reading in the daily Relative Strength Index (RSI) of the iShares 20+ Year Treasury Bond ETF (TLT) served as an early warning that selling short into the low-$120s was unlikely to result in superior trade location.
In addition to the oversold RSI reading, we saw the weekly chart of yields bump into a downtrend line near the 3% mark. The bottom line is that while I'm still negative on bonds on a higher timeframe, I believe prospective short sellers should remain patient and hold out for prices closer to the 50-day exponential moving average (EMA) before returning to the offer.
As far as equities are concerned, we remain in wait-and-see mode as we continue to chop and churn within a 50 to 75 handles zone. I know I've mentioned this numerous times in the past, but it bears repeating, even prospective short sellers should be cheering for an upside break at this point.
S&P 500 Futures -- Daily
Source: eSignal
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Using a composite profile dating back to mid-October 2014, we can see that 2100 has now become the most accepted price point to conduct business. In order to get any sort of decline that measures more than a few percentage points and lasts longer than a couple days, we need traders to auction price to a level where demand is thoroughly cut off. Such a pattern could easily be identified by large candlestick wicks (or an area of low volume rejection on a composite volume profile).
Friday's auction ended with little to no upside excess, so right off the bat the bulls begin the new week with a slight structural advantage. Monday's primary area of interest is expected to be 2113.50. Sustained value migration above that level has only one target, and that's 2119.75 and new life-of-contract highs.
S&P 500 Futures -- 10-Min Volume
Source: eSignal
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Keeping in mind that upside momentum has been impossible to maintain for months, it's still necessary to recognize that a failure to sustain a break of 2113.50 does not immediately transfer an edge to the bears. Two-way rotation back down toward 2102.25 and the big figure (2100) would be expected. But any sort of directional advantage extending beyond an hour or two would first require value migration and a session close beneath the mid-2090s.
Additional Notes:
1. Since the two most frequent requests I receive are for charts and opinions of crude oil and the U.S. dollar, I thought we'd take a look at both charts together. Spoiler alert: a rising dollar has not been bullish for the price of crude oil.
Crude and Dollar Futures -- Weekly
Source: eSignal
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Dollar bears and crude bulls have enjoyed some time in the sun over the past four to six weeks, but I question the safety of remaining in either camp too long. We discussed selling the dollar against the big figure (100) around mid-April, but having declined back toward the mid-90s, I believe the time to be short the USD has passed. Perhaps one doesn't get long too quickly. But remaining short seems risky against the February 93.5-94 floor.
Similar to the decline in the USD, I am very suspicious of the current rally in crude oil. From a short-term trading perspective, crude is very close to breaking back under its short-term exponential moving averages (I generally use either an eight-day EMA or 10-day EMA). Such a break wouldn't doom the contract to a slide into the $40s, but it would be an indication that the prior rally (from around $50) was likely to take a break and consolidate further.
From a higher timeframe perspective, I can't get on board with buying crude as it rallies into its 30-week and 40-week EMAs, and as the Relative Strength Index (RSI) begins to test the 50-center line. The bottom line is that while the bulls still have a slight edge in the short-term direction of crude, the higher timeframe charts are telling buyers not to get too comfortable or overstay their welcome.
Any trading or volume profile related questions can be posted in the comments section below, emailed to me at parkcityyeti@gmail.com or posted to my twitter feed @ByrneRWS.
At the time of publication, Bob Byrne had no positions in any of the securities mentioned.