Bond rally lives or dies on taper decision

The cost of living in the U.S. was unchanged in November from a month earlier. No change in the consumer-price index followed a 0.1% decrease the prior month, a Labor Department report showed today. The core CPI climbed 1.7% from November 2012, matching the gains in the previous two months. The NAHB housing market index, a measuring of homebuilder confidence surged to 58 in December. This matches 2005 levels.

Equities: The MAR14 E-mini S&P 500 (CME:ESH14) is down 4 points to 1776.50. It looks as though after the big selloff that brought the market down to 1755 from above 1800 in just a few days, this market still might be weighted toward long liquidation in front of a potential taper tomorrow at the FOMC meeting announcement. We expect tomorrow could be fairly volatile. Our key level is 1785. This is our view for the next major barrier to the upside for this market. If there is no taper, we expect the market to rally above and beyond 1785. For now the market is consolidating above the key 1772 level but below the 1785 level. If there is a taper, we could see more selling down to 1760, possibly lower.

Bonds: The MAR14 U.S. 30-year bond futures (CBOT:ZBH14) are very quiet this morning, up 3 ticks to 129’15. We believe the bonds are headed to the low 120s during this potential taper cycle, which could start tomorrow. If there is no taper, we could see a short-covering rally. The recent technical trend for bonds looks to be down and the key resistance level is around 131’16., around 2 points above the current price. We think it would make sense for the Fed to do a small taper this month as many key economic indicators the Fed watches have shown significant improvement, including housing, jobs and GDP.

Currencies: The MAR14 U.S. Dollar Index (NYBOT:DXH14) is up 19 ticks to 80.41. We believe this could be the beginning stages of a rally to 81 and possibly higher. 80.37 is a key pivot level, and if the USD can stay above that level, we could see more rallies. Again, the key event this week for the USD is the Fed announcement tomorrow. If we get a taper, we expect a big rally in the U.S. Dollar Index. The MAR14 Aussie (CME:A6M14) is down 62 ticks to 88.32. Our next target is 87.50, and we would not be shocked to see the Aussie approach that level. Our next significant upside levels for the USD are 81.50 and then 82.60. 82.60 is the target for a potential reverse head and shoulders technical pattern we observe.

Commodities: FEB14 gold (COMEX:GCG14) is down $16 to $1,228 before tomorrow’s FOMC statement. Our key pivot level for gold is $1,240. We would not be surprised to see gold test below $1,200 if we get a taper tomorrow. MAR14 coffee futures (NYBOT:KCH14) are taking a breather from a big recent rally, today down .60 to $1.1410. We believe coffee still might have some rally left in it, and could approach the $1.20 level. MAR14 sugar (NYBOT:SBH14) has been very weak, and today is no different. Today sugar is down .18 to $.1609. It could even approach the 15.50 level.

About the Author
Anthony Lazzara

Anthony Lazzara, CEO of Newport Beach, Calif., commodities investment firm Lido Isle Advisors, spent 10 years as a trader and floor broker at the Chicago Board of Trade and Chicago Mercantile Exchange. Anthony has significant experience in the energy, fixed income, and equity futures markets. After being a long-time independent futures trader, Anthony saw a tremendous opportunity to educate investors on how to invest in professional traders. Anthony is now focused on his duty as CEO of Lido Isle Advisors.

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