Bond Prices Ready to Rally

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On Monday, the S&P 500 broke a four-day winning streak with a loss of 0.1%.  Breadth was modestly negative, but the up/down volume ratio was modestly positive.  However, total volume continued its recent malaise and fell to its lowest level of the year.  The daily Coppock Curve has a bullish bias for all 24 S&P industry groups.

Meanwhile, the long bond posted its second inside day in a row (with a lower high and a higher low than the previous session).  This may be a sign of fatigue.  The nearby contract has been in a near term downtrend for much of February and in recent days began testing the late December, early January short term base.   While further – and deeper – testing is possible, we would note that the daily Coppock Curve is positioned to bottom by very early March while the weekly oscillator may have bottomed within the past week.  Thus, we will be alert to the idea that a near term low in the days immediately ahead will be fuel for an intermediate rally.

With that in mind, we would remind readers that we have regularly made the case that, while we can (and do) count a five wave rally for 10-year yields between December 2008 and August 2009, it is much more difficult to count a similar five wave decline for long bond prices over that same period.  A much more “obvious” count is that long bond prices fell in three waves from December 2008 to June 2009, and then rallied on three waves into October 2009.  The overall downtrend since then also has a corrective look to it.  All of this suggests that a larger structure is incomplete and that a coming rally will also be an inherently corrective pattern.

From a non-Elliott perspective readers may also remember that we have previously shown a possible head-and-shoulder top in the long bond (and a pending head-and shoulders bottom in 10-year yields), which has been unfolding since at least June 2008.  If a coming rally proves to be corrective, it will likely be part of the right shoulder, which still appears to be in progress.

That said, key support is in the 113-112 area (with some intervening support near 114:08).  A breach of that level would effectively break the multi-year “neckline” and argue for significantly lower level.

Equally important resistance is in the 117:16-123:24 area, though most of the resistance is in the narrower 117:18-121:13 range.  That represents the top end of the right shoulder, so a break of that range would weaken the pending H&S pattern.