From the Desk of Ian Culley @IanCulley
The market barely reacted Wednesday afternoon following Powell’s remarks, cooking up a big, fat nothing burger for investors.
Market participants took the decision to leave rates untouched in stride. After all, the pause in the hiking cycle was the expected outcome. Since investors already pegged the Fed, the valuable information hung on Powell’s words or forward guidance.
Yet judging by today’s performance, it appears the market just needed a little time to marinate.
Yesterday’s failed reaction has given way to a delayed response as long-duration bonds scream higher.
But before we get ahead of ourselves and rush out to buy the bond market bottom, let’s check the charts…
First, the monthly 10-year T-note chart:
JC broke it down last night in his monthly strategy session. Reviewing monthly candlestick charts sits atop our list of best practices, forcing us to reconnect with the underlying trend.
Bigger picture: The path of least resistance remains lower for US Treasuries.
On the other hand, early signs of a potential bullish reversal are developing over shorter time frames.
Check out the 10-year T-Note futures daily chart:
Price is challenging the upper bounds of a multi-month downtrend line while the 14-day RSI nears its highest reading since May. Plus, momentum is posting a bullish divergence.
Christian Tharp joined the Morning Show earlier in the week, discussing the bullish divergence and the implications of a near-term bounce in the US T-Bond ETF $TLT. Keyword: near-term.
Christian is a swing trader eyeing a quick tactical rally. Here’s a TLT chart highlighting a couple upside objectives:
The 91.75 level coinciding with the 2022 trough and this year’s Aug. low marks a logical area of potential resistance and an initial upside target.
Perhaps a steep rally toward 99 is in the cards. But I imagine a prolonged base-building process occurs before price challenges that shelf of former lows.
Increased uncertainty rules the day. It’s evident in the choppy, indecisive market conditions.
Nevertheless, bonds are bouncing this morning, especially the 10- and 30-year futures.
As always, we must know who we are as traders or investors before entering the market. That’s especially true for approaching bonds at these levels.
Are you looking for a quick swing trade that could last a few days or a couple weeks?
Or, are you a longer-term investor?
If it’s the former, you have potential upside targets in TLT outlined above.
But if you have a longer time horizon, what’s the rush? The structural and intermediate downtrends remain intact. You could even call TLT a “falling knife.”
Instead of picking the bottom, give the bond market room to dance and see where it decides to land heading into the weekend.
Countdown to FOMC
The market is pricing in a pause in the hiking cycle until June 2024 following the Fed’s decision to leave interest rates unchanged yesterday.
Here are the target rate probabilities based on fed funds futures:
Click the table to enlarge the view.
Thanks for reading.
And as always, be sure to download this week’s Bond Report!