The theme this week is of course “All Eyes on Bernanke.” With that, the markets up until tomorrow morning’s key speech at Jackson Hole are becoming more and more subdued, with traders not necessarily seeing the need to be very active before such an important speech. Many commodities and other futures contracts are experiencing lower volume and smaller trading ranges this week. We are actually seeing profit-taking in markets that have shown recent strength (gold, stocks, oil) and rallies in markets that have been recently weak (mainly the US treasury markets).
We are very intrigued to see how the US 30-year Bond Futures will respond to what Bernanke says tomorrow about his outlook for the economy combined with his stated intentions and thoughts on a clear-cut QE3 implementation. We think the bond market longs will make a run for the exits tomorrow if Bernanke sounds fairly positive about the economy. What all the players are looking for however is his language about QE3. If Bernanke officially announces QE3, this would be extremely significant and we expect commodities, stocks, and bonds to rally. If Bernanke talks more positive about the economy yet does not officially announce QE3 (but leaves door open for more stimulus), we look for the bond market to reverse its rally and other risk assets (oil, stocks) to continue to travel higher.
We see first resistance for the DEC 12 US Bonds at 150 with our key pivot area at 151. The bonds could be forming a down channel as noted on the daily chart, as the major multi-month uptrend line was broken in the beginning of August. If housing numbers continue to pick up, we see the potential for the US 30yr bond to break recent lows of 146 and head down to 142. To us the 151 level is the line in the sand for this market.