10:42 am EDT:  We would protect any day trade shorts entered from the pivot area (see morning report) with a tight stop just above the 1049.75 level.  There have been more upside than downside surprises in this rally.  As this is shaping up to be a non-trending day, we would tighten stops if price reaches the 1040 to 1043 area (about to be hit as we write).  Still not looking for longs unless 1049.75 is taken out.  Will most likely not look to fade strength or weakness out of the current combined session range of 1039.75 to 1049.75.

The Precise Take – ES finding value at lower price levels

Leaders Analysis:   With a strong 7 Year auction yesterday, Treasury has wrapped up another highly successful auction week.  The 30 Year continues to be sandwiched between two anchored VWAP lines, one from the announcement date of QE on Mar 18 09 and one from the Jun 11 09 low (below).  The 30 Year T-Bond continuous futures contract is a good proxy for the long bonds’ underlying price action and we use the 30 Year itself as a proxy for the entire longer end of the Treasury market.  The 30 Year is clearly consolidating in a battle between the bond bulls and bears, which can continue for some time, but not indefinitely.  An eventual break up through the 122 level would be an indication that Treasuries will compete with equities on a more serious level for liquidity dollars.  Continued oscillation in the trading range is sufficient to see equities move higher, as they have for months.  The EuroYen is down materially overnight, confirming risk aversion.

Liquidity Analysis:  The first week of unwinding of Treasury’s Supplementary Financing Program (SFP) took place yesterday, with $35 B (of which $24.3 B was primary dealer purchased) not rolled over (at least with respect to the SFP program) and available in the markets.  Part of our theory is that Treasury wishes to lengthen the average maturity of its debt portfolio, and the increase in longer term Note and Bond auction offering amounts is indicative of this.  Another part of our theory is that at least some the unwinding amounts will be pumped into equities because of the similarity to the permanent open market operations of the Fed.  However, as we wrote yesterday, the exact timing of rallies as a result of increases in bank non-borrowed excess reserves has become more erratic and so, while we remain generally bullish until we see otherwise in the statistics published by the Fed, we cannot say that on such and such a date we expect an up day because of liquidity injections, etc.  In fact, we expect the corrections to become more, not less, violent as the subsequent short covering rallies will be the drivers to new highs.  With the world expecting a correction into October, this is the ideal time of year to shake out weak holders on both sides. 

Trading Today:  As we write, Durable goods has disappointed and the ES has entered our intraday bearish area that begins below yesterday’s low of 1041.00.  The ES is finding value in the area centered around the long term market profile point of control at 1037.75, which is a natural price target today.  If price trades below there by more than a couple points, the ES could eventually head as low as…

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