Consolidation brings consternation

February 27, 2018 02:31 PM

As clearly observable since no later than early last week, directional trend moves were lapsing into consolidation phases. And with those come a degree of consternation. While it might seem that the less directional trends might leave a more subdued psychology, the memory of the more aggressive trends leave many market participants on edge. That is often due to the degree to which there is concern over not missing the next major price move in spite of the current lower volatility.

Yet it is classical that especially after a particularly significant accelerated trend, markets are more likely to go into a consolidation phase across ‘time’. While there are rare cases where a subsequent large trend extension comes directly in the wake of only a very slight pause, for the most part looking for the next ‘big move’ directly in the wake of the end of a recent major parabolic price swing (essentially the case in U.S. equities) is misguided.

This raises a good question about last week’s new recent high obvious on the March Bund future chart. Yet there is a reasonable answer for how this can still be part of a reactive consolidation of the previously extended downtrend. The fact is some consolidations countertrend, recapturing some of the ground from the extended trend. As all of our experienced readers know, the question is whether that creates any definitive sign the reaction has actually turned into a reversal. While we will review the other consolidation phases as of the end of last week as well, at least so far they are more so still classical sideways consolidations.

But the Bund is of particular interest due to the recent new trading high creating a feeling of a potential upward trend reversal. Yet in the context of the broader Evolutionary Trend View (ETV), there are significant technical trend obstacles to any reversal of the overall downtrend. And the March Bund future is also especially interesting as the most resilient of the govvies, only playing catch up with downside leader U.S. T-note on its late-January violation of the major 160.50-.00 support. And therein lays the tale of the trend that must be closely monitored as things unfold from here… with some very interesting ETV grounds to doubt any reversal into a bullish trend.

Yet, prior to discussing the still formidable headwinds for any major trend reversal in the Bund (which might possibly influence the other, weaker govvies), we must allow that the current chart and associated indicators create a more bullish near-term picture for the stronger sister of the govvies. The push above that March Bund future 159.30 initial Feb. 5 recovery high is also an up break out of a loose triple bottom.

That those lows were multiple tests of the major 157.50 support (more on that below) makes this more impressive in the short-term. As does the 158.40-.25 up break above the overall December-February daily down channel and current daily MA-9 & MA-18.

The loose triple-bottom 159.30 up break having a rote objective (minimum target) of 161.10 also begs the question whether this is a very bullish sign that might spill over into a reversal of the downtrend in all the govvies? However, as noted previously for the U.S. Dollar Index, while Breakouts are important they are only indications of what the market is supposed to be doing, not guarantees of future activity.

Strong enough breakout?

In the case of the greenback, a far more prominent U.S. Dollar Index three-month inverse head=and-shoulders bottom late October 94.35 "up" break failed into mid-November. That Breakout Negation led to the renewal of the overall downtrend in place since the beginning of 2017. In a similar manner, the current much less compelling March Bund future 159.30 UP Break needs to be kept in the context of the major 160.00 area higher congestion in spite of that nominal 161.10 Triple Bottom Objective.

In fact, two words of caution are necessary on both the importance of the 160.00 area as a key higher threshold, and the degree to which any rally from the lower support can be maintained after the typical early expiration of the March Bund future on Thursday, March 8th. See the monthly chart from our February 11th Weekend: The "Demand-pull" bond bear post for key indications. In the first instance, with some slippage along the way (the March 2017 159.00-158.73 previous two-year trading low) the 160.00-.30 range was the major congestion support only violated in late January.

That makes it a formidable threshold which must be surpassed to signal any sustained trend reversal. Also, note that daily MA-60 (consistent with weekly MA-13) is moving down into the mid-low 160.00 area over the next two weeks.

What is also obvious on the long-term chart was front month Bund future holding its major 157.50 almost 10-year up channel support (from the mid-2008 lows) on the February test. Recovering further since that early month chart view also leaves it back above the often important monthly MA-48 (check out that 25-year chart.) Those combined support factors once again seem to point to a potential return to a far more bullish trend. Multiple bottom "up" break with a much higher Objective, upside violation of key daily MAs, not violating its major monthly chart channel? Why not?

"Continuation" consternation as well

Yet, there is that typically early quarterly Bund future expiration to deal with into and after March 8th. That has created some major transpositions of front-month Bund future prices due to major second-month premiums and discounts to the expiring lead contract. Most prominent in recent memory were major selloffs triggered by big discounts in the second month into the expiration phase (September 2016 and March and September 2017.) That is pending now on the 2.67 discount in the June Bund future.

While it might shift into a more positive position over the next week-and-a-half, that would be unusual, especially with the current, still upbeat economic psychology. With that, consider the implications relative to the challenges still facing the improved March Bund future trend.

Unless it can overcome the major two-year superstructure 160.00-.30 congestion resistance, it will remain in an overall downtrend even it only sustained weakness back below 159.30 will likely trigger a return to move aggressive weakness. That is likely for the June Bund future as the front month on the continuation chart unless there is reason for a very strong rally from current levels.

And with that major monthly chart 10-year up channel moving up to 157.75 in March, any March contract failure at no better than 160.30 will still leave June Bund future at no better than that major channel level and below. This will create an indicating a de facto down break. This is not even to begin to consider what it might take for the June contract to claw its way back above not just that area, but also 158.50 and 160.00.

So, while the March Bund future might seem strong for now, unless it can sustain activity above its higher major resistance there is still a bear trend in place. The importance of that is still as discussed for the June contract as pending front month.

The next lower support if 157.75-.50 fails is the 155.00 area, with 150.00 and 148.00 below that. It is going to be a very interesting couple of weeks for the front month continuation chart. The success or failure of the March Bund future to overcome 160.00-.30 resistance will have broader continuation implications so typical of quarterly futures expirations.

The same is true in a lesser way for the other govvies. Yet they remain quite a bit weaker than the Bund. The weak sister March T-note future is only back up around the important 121-00 area. Its more major resistance at the failed 123-00/122-22 6.5 year low area leaves quite a bit of room for a further reactive rally without signaling any trend reversal. Recall that this area was only barely and very temporarily reached during the major U.S. equities selloff early this month.

And while the March T-note future expiration is not until March 20th, the June contract is trading at a typical full half-point discount. This is also the case for the late-expiring March Gilt future where the second month is trading at a full 1.00 discount. With the March contract still below its own 18-month failed front month 123.00-122.60 trading lows area, that illustrates the degree of resistance there even if there is a new recovery high.

As such, even with the Bund leading the way higher, there is that much more of a burden of proof on any T-note or Gilt bulls to establish any bona fide downtrend reversal.

US Dollar Index

There is similar consideration for the still bearish U.S. Dollar Index that held dual tests of the top of our 88.50-.00 projected historic congestion support in late January and again last week. Yet it has not as yet pushed above its early February 90.56 interim high. That said, the intraday recovery from the recent modest and temporary slippage below the previous 88.50 area low on Friday, Feb. 16, left a 88.61 "up" closing price reversal. As that was very modest in the context of the overall down trend, it is unlikely a sign in and of itself that a more significant trend reversal has occurred. Yet it does serve to reinforce the importance of the 88.50-.00 area on any subsequent selloff.

And as we have cautioned repeatedly, the 90.00 "big penny" area is not an important technical trend threshold. Those would be up at the 91.01 failed September low bottom of the head of the negated inverse head-and-shoulders (H&S) bottom, and even much more so up into the three-year 92.00 area lows only significantly violated in January. That was part of the overall Inverse H&S Bottom failure in process since mid-November. 

This is why we ran the daily chart from the stallout of the 94.35 late-October Inverse H&S Bottom that led to the return of the bear trend. So even though the daily U.S. Dollar Index chart appears to be on a 89.75 up break and above daily MA-9 & MA-18 (much like the March Bund future), it has yet to attempt the currently forming Double Bottom UP Break above the early February 90.56 interim high (the ostensible pending UP Break level.)

And even if it should, also much like the current indications in the March Bund future, would it be able to extend the rally to violate at least that key 91.01 failed September low and ultimately sustain activity up into the higher range above the 92.00 area? Along the way, it is very interesting that daily MA-60 (once again the proxy for weekly MA-13) is headed down into the 91.00 area over the next couple of weeks.

This is once again very similar to the March Bund future moving average component of the Evolutionary Trend View. It allows for a double bottom up break above 90.56 while still leaving that aspect less than compelling regarding any sustainable downtrend reversal pending what transpires at higher levels… much like the low 95.00 area was the next U.S. Dollar Index resistance that stalled the extended uptrend after the late-October 94.35 up break.

And here as well the same goes for the other foreign exchange indications. The euro/U.S. dollar (EUR/USD) currency pair that stalled into the 1.2500-50 range prior to the recent reaction down into the 1.2200 area could still drop to 1.2100 or even 1.2000 without reversing its overall uptrend. The same goes for weaker sister British pound on the British pound/U.S. dollar (GBP/USD) currency pair drop back below 1.4100 and 1.4000 while still also holding no worse than the 1.3850-00 range. This is much the same for the as resilience of the Australian dollar and Japanese yen as well. 

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About the Author

Alan Rohrbach is Lead Analyst and President of Rohr International, Inc.  He is an international equity index, interest rate and foreign exchange trend advisor. His forte is ‘macro-technical’ analysis of how fundamental influences blend with technical aspects to drive trend psychology. Clients include international banks, hedge funds, other portfolio managers and individual traders.