Fed Tapering is the most commonly used phrase in market commentary these days, and has been blamed as the driver for why US stocks pushed lower yesterday. However, yields of the benchmark 10Y Treasury Note did not increase, but instead Bond prices actually got more expensive, bouncing off the 125.0 mark. This seems to go against the notion that the market is extremely paranoid about a tapering announcement during September FOMC meeting, as that should mean cheaper bond prices and higher yields.
However, considering that these newly renewed fears are based purely on speculation and nothing substantial, it is no surprise that speculators are losing out to technical traders who are lining up 125.0 hoping for a short-term rebound. Furthermore, this is not the first time tapering fears reared their ugly head. It is conceivable that most speculators would have already entered short on Treasuries the first time Bernanke spoke about a QE tapering timeline back in the June 19th FOMC meeting, which resulted in US10Y prices falling from slightly above 130 to almost touching 125.0 back on 8th July.
Certainly it is possible that some of these traders would have taken profit along the way, especially since price did rebound back in mid July. However, the number of speculators that are available to sell in this round of speculation is definitely going to be less than the June batch, resulting in a smaller bearish run this time round.
From a technical point of view, the current rebound from 125.0 will face some slight resistance from the descending trendline. Stochastic readings suggest that a bullish cycle is imminent. Should the descending trendline be broken, it is likely that stoch readings will also push above 20.0 for a proper bullish cycle signal. 126.0 will be the next level of resistance above the trendline, followed by 127.0. It is important to note that the current rally can only be regarded as corrective, as the downtrend from May remains in play. Price will need to break 128.0 and preferably 130.0 before bearish pressure can be alleviated.
Interestingly, Bernanke will not be attending the Jackson Hole Central Banker meeting this Friday, breaking a 25-year tradition. Hence there will not be any keynote speeches by the Fed and we are unlikely to see any major announcements coming out with regard to QE tapering. Perhaps Bernanke is avoiding this meeting to prevent himself being cornered on whether a QE taper will occur in September. Or perhaps he is simply wanting a holiday, especially since there is no reason for him to attend considering that his term will finish at the end of the year.
Whatever the reason, we will not be receiving any indication about taper, and hence it is likely that technicals will continue to reign in this week with no other major US news in store.
Original post