10:32 am EDT:  The ES reversed at the very bottom of the daily gap/pivot area where we were willing to go long.  Price action suggests a 1024.75 initial target (nearly reached as we write), which is one point off the early day session high.  We will be careful to protect profits there and, should the move extend, 1029.75 to 1033.00 is the next reversal area.  Should 1019.00 be broken to the downside, we will have entered our intraday bearish area, and we still don’t like shorting into strong support, and will only fade long 1014 to 1015 or 1008.25 to 1012.25 if price action suggests a strong and quick rejection of the downside.  Longer term, if we are going to get a top this week, it is most likely before the 1pm 10 Yr auction tomorrow, so intraday bottom pickers (below 1019) beware today.

The Precise Take – Strength in equities leading into critical Treasury auction week

Treasury Analysis:  Today is the first of three major auctions this week for Treasury securities—today is the 3 Year, tomorrow the 10 Year and Thursday the 30 Year.  The 30 Year T-Bond future backed off its major resistance are Friday on the equities advance, nearly reaching the 50% retracement support at 118 7/32 from the August interim low.  As equities are now testing highs, key will be to watch the 30 Year’s reaction this week to the various auctions with 117 4/32 to 118 7/32 containing the Fibonacci box from August lows and VWAP anchored from the June 11 09 low of the year.  If we do get reversals this week in equities (down) and Treasuries (up), it will most likely be from this support area by early tomorrow (though possibly after the 10 Year auction at 1:00 pm tomorrow).  We expect Treasury auctions to be the biggest news items of the week and they should be watched closely.

Gold:  Gold futures broke through 1000 overnight (high of 1009.40 basis Dec 09), but we would like to see confirmation with gold priced in Australian and Canadian Dollars break through swing high resistance from late June to mid-July 09.  Until that happens, we consider the rally based on Dollar weakness, and not yet sufficiently broad based to signal a strong move up.

POMO:  Today is the only day on which the Federal Reserve Bank of New York will conduct permanent open market operations for Treasury securities this week (though it will likely announce another Agency POMO), and the Treasury program is expected to end with next week’s two POMO days (Sep 16 & 17).  The program was prolonged to end in October 09, but will likely reach the $300 B cap in next week’s auctions.  In the unlikely event that the program dollar cap is increased, expect violent moves in both Treasuries and equities.  Both have benefited from the program—Treasuries because POMO supports demand and equities because the proceeds appear to have been channeled into the stock market.  However, the markets may call Bernanke’s bluff and any prediction on an eventual reactionary move is extremely speculative.  Though the day trading POMO pattern of paint-the-tape closes had subsided, it was resurrected with last Thursday’s strong close (it was a POMO day for Agency securities).  The Treasury POMO program could end with a bang rather than a whimper into next week, with every last leveraged dollar from the proceeds squeezed into equities, so just a word of caution to the shorts.

Trading Today:  While we are not surprised to see the ES up again at the highest market profile value area (primarily because of gold strength and the correlation we noted last week), the rally was not on what we would consider a clean NFP reversal.  Rather the move began a bit high (10 points off the lows) to consider the NFP pattern to have held.   Back to market profile, if the ES continues to accept value above 1019-1020, there is a good chance we will see new highs.  If current highs are to be respected, the ES should reject this area by early tomorrow.  We are willing to go long in an early retracement into the daily gap/pivot area of 1019.00 to 1021.75, but become intraday bearish below.  Despite this, we will likely avoid…

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