Friday’s Yields Demolished – Perfect Example Of Why News Is Secondary

In yet another example of why the news cannot be trusted, US bonds yields were crushed on Friday even though the headline news that has been at the front of everyone’s minds is the possible default on US debt obligations. So in the face of a possible default yields on the 10 year were down 5% on Friday as equities were also down substantially on the opening bell before recovering throughout the session. The market is so used to bonds being fundamentally linked to monetary pressure that traders may have forgotten that there are several other factors that drive bond prices. Ultimately, the US has the ability to pay off its debt by raising the debt ceiling, but the reason why it wouldn’t be paid (hypothetically) would be to lack of agreement in Congress and the White House. Therefore, it’s not the bond that is insolvent per se, it’s the ineptitude of the clowns in Washington to simply raise the debt ceiling and then debate the budget afterward.

That all being said, one could have come to the conclusion that bonds would rally by observing the bullish consolidation pattern on the chart of TLT.

TLT made a 9 month high Friday and was able to pierce resistance at $98. There is still strong resistance at $98 as it came off of the highs after breaking through them earlier in the session and it is possible that bonds may have put in a short term top since some of the fear should subside after the debt ceiling is agreed upon.

Also, a downgrade is looking more and more likely. Moody’s is either making themselves look more foolish than they already are by constantly attempting to grab attention, or they are actually serious about a downgrade and will do so next week. Moody’s, like S&P have missed many obvious ratings in the past (take MBS for example) and it seems foolish for anyone to care what credit ratings they decide to give out. Additionally, a downgrade of US debt without labeling many others across the globe as junk is hypocritical and adds to the ridiculousness of their image. In any case, I would advise staying out of bonds until the outlook becomes clearer but if I had to choose, I’d have to favor the downside in the near term.

The S&P was down about 20 points by 10 am Friday after the news that Boehner’s bill failed in the House overnight but the market rebounded after Harry Reid announced that his own debt agreement bill would be pushed through the Senate. Not coincidentally, the market initially fell into the 200 MA which also coincides with the trendline going back to March 2009. A confirmed break of this trendline will signal a fundamental change in the market. I do expect this to eventually play out but with yesterday’s price activity, it was obvious that it was not set to happen then and there.

Remember the fundamentals of the chart, any time you gap down into or trade straight into a key level without first consolidating, there is usually a 90% chance of that level holding and it usually results in a bounce. For this reason, I have not sold any of my long positions and you can see the market is already sharply off of the lows and managed to only lose .65% with the close on Friday.

To further support my theory, the weekly chart of the SPX shows an inside bar bull flag off of the sharp move up from the Independence Day rally. The pattern is valid as long as it stays above 1258 on a closing basis though I personally won’t hold long positions if the market moves much lower.

I think the more likely scenario is the market sees some upside next week though it may be a bit of a stretch to think that it will break resistance at 1345 which has been an amazing resistance level so far.

Once again, if the powers that be really believed that there would be a default, gold and silver would have been up 5% yesterday and I believe that gold, like treasury yields, confirm the likelihood of a rally in the equity markets next week. Gold should have traded much higher yesterday if there was a legitimate default risk and like I mentioned earlier, situations like this are why the news is secondary to the chart. I have been talking about this for a few weeks but gold is still very extended which should tell us that any bad news is already baked into the chart – and that is why gold did not explode on Friday.

So, to follow up with Thursday’s analysis on silver and due to requests, gold is still extended and Friday’s close of $1628 was less than impressive considering the noise that was going around regarding the debt ceiling. Gold is up 10% in the last four weeks which is the most it has been up in the shortest amount of time since the bottom in October 2008. I have talked about this many times before, but to summarize once again, gold typically makes two peaks during the bullish moves in its cycles. This here is the making of the second peak and it is no coincidence that it is happening as the debt ceiling is being debated. Any debt ceiling resolution should be negative for the precious metals and should be a catalyst for a correction in both gold and silver.

The bottom line is until I see bottoming patterns that coincide with cycle lows in gold and silver, I won’t spend any investment capital on them and they will remain nothing more than trading vehicles until that time.

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About Aaron Basile
Market Technician, Equity/Commodity Trader, Austrian Economist, Contrarian Investor

One Response to Friday’s Yields Demolished – Perfect Example Of Why News Is Secondary

  1. Pingback: Friday’s Yields Demolished – Perfect Example Of Why News Is Secondary » Greece on WEB

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