10:58 am EDT:  The ES pierced our fade long area by 1.5 points (low 1013.25), but has managed to retrace to an area where we are willing to short–1019.00 to 1021.00.  Shorts will not want to see the 1023.25 overnight swing high violated.  We would avoid looking for longs above there, though, as there is much resistance up to the 1031.00 level.  For a down trend day, we would like to have seen a new low by now, so we would tighten stops on shorts if the lows are again tested.

The Precise Take – ES trading in lower end of last week’s range

General Analysis:  With all our leaders at support or resistance and consolidating, we are expecting an extended move to begin soon (likely this week), perhaps with Friday’s Employment Situation report being the final sendoff.

Trading Today:  While we aren’t prepared to sound the alarm bells just yet, the ES is trading lower overnight, having breached daily S1 (low 1019.25).  Without any major news, a week Chicago PMI at 9:45 am could lead to a larger selloff.  We are willing to fade short a move into the 1027.00 to 1030.50 area, and become intraday bullish above 1030.50.  The ES is currently in our intraday bearish area from 1022.00 downwards, though we would fade long the 1014.75 to 1015.25 area that contains last week’s low and weekly S1.  Below that, and…

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Our submission for this week’s Chart Junkie on Wall St. Cheat Sheet (to be updated this afternoon) features “Bank non-borrowed excess reserves” from the Federal Reserve’s H.3 Statistical Release and how they correlate with the S&P 500.  We explain as follows:

US banks are required to keep money in reserve based on requirements set by the Federal Reserve (the Fed).  Anything beyond that is considered excess reserves and is generally held on deposit with the Fed.  Since last September, with the myriad Fed programs initiated, excess reserves have exploded (and along with it the Monetary Base, which includes excess reserves).  Some of these excess reserves are borrowed–for instance, the Fed may lend money to a bank based on collateral posted by the bank to the Fed, which could be a Treasury Security, an Agency Security, or even a Mortgage Backed Security.  Eventually, this money must be repaid and the collateral is returned to the bank by the Fed.  However, banks also maintain non-borrowed excess reserves, which is money on deposit with the Fed that they can use for any purpose without the need to repay it.  Banks might lend it out or, as seems to be the case this year, use it to ramp the stock market.  This money has come largely from permanent open market operations, whereby the Fed purchases Treasury, Agency and Mortgage Backed Securities from banks and deposits the proceeds from the sale in the banks’ accounts at the Fed.  As is demonstrated by the thick green line, non-borrowed excess reserves have increased dramatically over the past year and appear to be correlated with movements in the stock market.  We will soon be posting a more detailed analysis of the ramifications of this correlation along with how this may aid market timing.

12:13 pm EDT:  This week’s trend of stocks being unable to rally off neutral to bullish news has continued this morning as the 9:55 am Consumer Sentiment was at the upper end of expectations, yet the ES has fallen after posting a nominal new contract high (1038.75) on the open.  We are no longer looking to buy at the daily pivot (1025.50) and instead would wait for the ES to climb above 1033.00 again before attempting a long.  If the ES can move below 1025.50 with a pickup in volume, we may look for shorts, but very carefully as the markets in general appear to be consolidating for a breakout (either today or early next week). 

The nominal new contract high and reversal downward in the ES this morning coincided with a precise bounce in the 30 Year T-Bond future off the 61.8% support retracement level of this week’s range.  As we write, the 30 Year has now retraced 61.8% of the move from yesterday’s high to this morning’s low.  Gold too reversed downward off long term trendline resistance after advancing strongly earlier.  All in all, the precise technical consolidation taking place among the various markets should be a warning.  There will probably be a few fakeouts and false starts that will sucker in new longs or shorts prior to the ultimate move being made.

The Precise Take – Stocks able to bounce despite strong demand at 7 Year auction

Treasury Analysis:  We wrote yesterday that the inability of equities to make gains off bullish to neutral news this week was bearish.  However, their ability to rally in the face of the above average 7 Year auction yesterday is bullish.  It looks like the strong resistance area we noted yesterday in the 30 Year T-Bond futures is proving too difficult to traverse, and without money flowing into Treasuries for the time being, equities are able to gain. 

Time Profile:  Today is a day on which the Federal Reserve Bank of NY will be conducting Agency permanent open market operations (POMO).  The ES has been deviating more and more recently from the POMO Time Profiles, however, we believe it is prudent to be always at least be aware of the statistical tendencies.  For Agency POMO days (nearly all of which have been conducted on a Friday since June 09), there is a slight bullish bias for the day, especially from the 2:30 pm to 3:30 pm hour, with the final 45 minutes having a slight bullish bias, but tending to be more of a mixed bag as indicated by the range of Net Points (thin grey line).  The bullish bias for the day was much more pronounced from Mar 09 to May 09, but still exists and should be considered. 

Trading Today:  As we write, Personal Income & Outlays at 8:30 am has not moved the markets materially.  Accordingly, we have a bullish bias into Consumer Sentiment at 9:55 am, upon which any significant deviation from expectations will likely lead the direction of the markets for the day.  If it’s within expectations, we’ll likely have a…

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1:25 pm EDT:  Bid to cover ratio was 2.74 with non-primary dealers taking about 63%.  All in all, not bad, though the 30 Yr yield spiked up a bit (and subsequently retraced the spike) on the results. 

The day has turned from bearish to neutral now, so we don’t have a directional bias into the afternoon, except for the statistical tendency to have a bearish closing hour because of yesterday’s POMO.  Accordingly, we consider any positions entered in the middle of the day’s range to be aggressive, preferring to fade the range, with stops close to the extremes.

11:41 am EDT:  Paying head to the spike up and subsequent retreat on the 8:30 am reports this morning has paid off, as the ES has fallen, but found support at daily S2.  Though S2 was a potential reversal area marked in our morning report, we preferred to hold out for the 1008.50 to 1011.00 area before attempting any longs.  We will likely remain out of the market until after the 1:00 pm 7 Year auction.  If it comes out average or above expectations, we would expect a resumption of the down trend in equities for the day.  If it comes out poorly, equities could climb into the afternoon.  However, in this (unlikely) scenario, if the ES cannot break the day session high of 1027, by 3:30 pm, we would be wary of holding onto longs.

After further review of the 8:30 am reports and the prior days’ news, we find it bearish that equities have been unable to advance in the face of good (and at least not bad) news.  If the 7 Yr auction cannot move equities higher, there is still Personal Income and Consumer Sentiment tomorrow to close the week, but we do not expect an “upside surprise for economists”.  Further, even if equities head lower into tomorrow, the FRNY has announced today that it will conduct Agency POMO tomorrow, which tends to lift equities into the close, especially when the Thursday before was not itself a POMO day (as is the case this week).  All in all, while the prospects of higher highs in equities is looking dimmer into tomorrow, longs should not fear disaster unless multiple news items disappoint strongly.

The Precise Take – Equities maintaining into final Treasury auction of the week

Medium to Long Term Analysis:  Below is the 30 Year T-Bond futures chart updated through this morning, which shows the 30 Year still hovering around resistance (red rectangle).  That it didn’t retrace this week to the 61.8% (or even the 50% level) of the most recent upswing is bullish for it (and bearish for equities), but today’s 7 Year auction will likely be the catalyst to either new highs or a stronger retracement downwards.  Our bias is for a strong 7 Year (bearish for equities) as we had last month, but anything is possible as always.

Time Profile:  Today is the day after the FRNY has conducted permanent open market operations (POMO).  Since inception of POMO in Mar 09, there has been a bullish bias in the opening hour and a bearish bias in the closing hour.  These biases dissipated slightly in May and June, but have reasserted in July and August (see page 2 for chart).  If there are gains today, we would warn to protect profits before heading into the close.  If we head down today, losses could accelerate into the close.

Trading Today:  As we write, GDP (revised) and Jobless Claims released at 8:30 am caused a slight upsurge to 1031.00 in the ES, with a subsequent retreat downwards.  We always pay head to spike highs on important news around contract highs, so longs will need to head higher early to prevent a potential selloff.  The one mitigating factor to this bearishness is the…

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The ES is looking like it wants to put in a top on the daily chart and needs to close over 1027.50 to continue this rally.  See below for where we are intraday bullish and bearish.  30 Year T-Bond futures have advanced strongly while equities have largely gone sideways over the past two days.  A good 5 Year auction today or 7 Year auction tomorrow could push the 30 Year through resistance and help put in an interim top in equities.

Just the chart this morning as we are travelling all day.  We will be back on our regular schedule tomorrow.