The Precise Take – New highs overnight into critical week of Treasury auctions

This week, the massive Treasury auctions take center stage and, as we reported last week, will likely determine the rally’s life.  Excellent demand for Treasuries, as we had last month, will likely kick off a correction, while tepid demand will likely provide the inflationary fuel to set new highs.  A mediocre showing allows other factors to determine.  Also closely watched and anticipated is the first edition of Q2 09 GDP this Friday at 8:30 am.  Today, we have the 3 and 6 Month auctions at 11:30 am and 20 Year TIPS at 1:00 pm.  Because the former are short in duration, we do not anticipate week demand and are instead looking ahead to the 52 Week and 2 Year auction tomorrow at 1:00 pm, with the 5 Year on Wednesday and 7 Year on Thursday.  As to the TIPS auction today, we also do not expect demand problems because they are inflation linked and demand has been historically strong.  Of course, any upset will be seen as a bellwether for the upcoming auctions.

We regained our short term bullish posture on the breakout of the 957.50 high last week and will remain bullish, even at overbought levels, until price action or market leaders tell us differently.  However, we are increasingly sensitive to corrections and will pay special attention today and tomorrow to gold, 30 year bond and 10 year note futures, which are each at levels from which they will likely reverse sharply or break through strongly to test old highs or lows.  Gold has been testing the 61.8% resistance from its early June highs and broke through slightly overnight, but has since retreated.  A strong push through is bullish for equities as it is indicative of inflation expectations.  The 30 year is at its 61.8% support from June lows and the 10 year at 50%.  A break down is also bullish for equities and a reversal is bearish.  The success or failure of the auctions this week could be broadcast in these instruments first, and we will update accordingly (register for free notifications and updates here).

As if it were not tricky enough this week, the Federal Reserve Bank of New York (FRNY) will be conducting permanent open market operations (POMO)* back to back, Wednesday and Thursday, which will flood large banks with leveragable liquidity at about 11:00 am on each of those days, which has an end of day tape-painting effect.

After testing daily R1 overnight (high of 984.00), the ES is heading below Friday’s settlement of 977.75.  We don’t become bearish intraday until 972.25 is broken, but are willing to fade long key support at…

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