Technical problems prevent us from posting the usual PDF this morning, so the report is in this post only.

The Precise Take – Was the poor 2 Year auction yesterday a head fake?  Asian-led weakness overnight.

As we updated yesterday:

Gold materially down from resistance and 30 yr/10 yr holding support today give a bearish tilt to the market’s direction this week and are forecasting successful Treasury auctions.  Also, the EuroYen forex cross, as a barometer of risk, has also materially corrected today in a bearish engulfing candlestick pattern. 

Accordingly, the most likely scenario this week that we envision is a down day today, up day tomorrow into the close because of POMO, retest of highs either by end of tomorrow or early Thursday, then heading down again into Friday close, with the markets attempting to find support and continue the rally sometime next week.  If we can reach new highs by early Thursday, then we could easily see another short covering rally into the 1008 target zone by Friday close; however, this is the less likely scenario.

 Though this was at 10:44 am, before the 2 Year auction, we see no reason to alter our forecast as overnight trading in Asia has led the ES lower.  Also, as we wrote yesterday:

[Wednesday] and Thursday of this week are back to back days in which the Federal Reserve Bank of New York (FRNY) will be conducting permanent open market operations (POMO), which will flood large banks with leveragable liquidity at about 11:00 am on each of those days, and which has an end of day tape-painting effect.  … [Wednesday] we would also expect most gains to be into the close.  And, though there have been only 6 prior back to back POMO days (all since May), the bullish edge appears to disappear on the second POMO day, which would be this Thursday.  Accordingly, swing longs may want to close out positions by tomorrow (Wed) as opposed to waiting for the close on Thursday.

The end of day paint-taping on POMO days has been remarkably consistent, so our primary scenario will be in jeopardy if, by 3:30 pm, the ES is above yesterday’s point of control and long term point of control in the 973.00 to 973.25 area.  Above, and the ES will likely be able to push through critical 980 resistance by close and will hav the 1008 target in sights.  Below, and we will likely only retest highs and head down into Friday.  The next point of control is at 948.75, so that seems a reasonable target.

The 5 Year auction is at 1:00 pm today, with 10:30 am (petroleum) and 2:00 pm (Fed Beige Book) as other report release times to monitor.  Though many would say that forecasting the results of a Treasury auction is a mugs game, as we suggested in the lead of today’s report, leading indicators are pointing to successful auctions for the 5 Year today and 7 Year tomorrow.  If we are wrong, we expect to see 1008 soon.

As we write, Durable Goods at 8:30 am was below expectations.  The critical area today is 973.00 to 977.75, which includes the points of control mentioned above as well as the daily pivot/gap area.  We’re bearish below and bullish above, willing to fade long only at the daily S2′s at 959.00 to 960.50.  Fading short in the bullish area today is too risky for us so we won’t fight a bullish trend above 977.75.