by Jim Donnelly, Olson Global Markets

The bond market finally got the shivers last week when it came to grips with the enormity of the need to raise cash through massive treasury issuance. As a result, the yield on the treasury 10-year note spiked up to almost 3.76% before buyers stepped in at weeks’ end.

This quick rise in longer term interest rates steepened the yield curve and, of course, started to shake up the mortgage and the mortgage refinancing markets just as they were getting a real head of steam.

In addition, the question of future inflation versus current deflationary tendencies moved to the forefront of active debate last week. Commodity prices continued their ascent despite a vast amount of slack in the global economic system. Manufacturing plants are shutting down with workers being idled albeit at a slightly lesser pace than had occurred the prior three (3) months. Nevertheless, continuous jobless claims hit another record high last week with weekly claims still posting numbers north of 600,000.

The dollar index also weakened quickly last week following an early run-up triggered by the well documented nuclear detonation and missile activities both conducted by the rogue nation of North Korea. Nevertheless, it appears that the trend in the dollar has turned decidedly bearish.

Therefore, the real question now is: How bearish?

First off, when looking at “yield” charts the term “resistance” really means “support when thinking in terms of bond prices since bond prices drop when yields rise. Now that this has been clearer up, long-term charts show that “channel top” resistance on 10-year treasury notes sits at 4.85% (in blue). The underside of former yield support (in red) does as well. That means that the 4.85% level represents key “support” when thinking in terms of 10-year note prices.

Supporting this technical view are both long-term Stochastic and RSI studies which favor a rising rate scenario. That said, 4.85% is a whole lot higher than the Friday’s close 3.465%. This, in turn, suggests that the window to ultra cheap mortgage and refinancing money may be rapidly coming to a close.

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by Jim Donnelly, Olson Global Markets

Although spiking higher from last week’s 26.57 low print to close the week at a reading of 32.63, the CBOE Volatility Index (or the VIX) may be headed lower in the weeks ahead.

Clearly, the VIX is already in a deeply oversold condition when looking at week charts. This suggests that a correction higher in the VIX is in order over the short-run. Once such a rebound higher occurs and then begins to languish however, the VIX index appears ultimately aimed for a test of the 24 area where two forms of trend line support converge on weekly charts.

No doubt the relationship between the S&P 500 Index and the VIX has been an inverse one. As the S&P 500 rises, the VIX declines. Thus, a weaker VIX suggests higher equity prices…if, of course, this relationship holds.

Some technicians, however, believe that the decline in the VIX since its 89.53 October 2008 high is already extreme, and suggest its decline is likely over or is nearly so. That would imply that the 910 level on the S&P 500 might be important intermediate-term resistance.

It is worth mentioning on the other hand, that the market often “overshoots” a trend or a correction even if it opposes what the underlying fundamentals suggest.

In this case, an eventual test of the 24 area on the VIX would likely complement an eventual move toward 980-995 on the S&P 500 Index. This is an area on the S&P 500 that we have suggested in the past is where the real battle will likely be fought between equity bulls and equity bears.

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by Jim Donnelly, Olson Global Markets

Although a multi-week advance in commodity prices stalled during the past week, price activity on daily bar charts suggests the CRB Index will likely move higher again soon. That said, a brief correction lower should occur first.

A bullish reverse Head & Shoulders pattern that began to form last November appears to need a little more time in order to form its “right shoulder”. A view of the chart below suggests that a pullback toward 50-day moving average support near 224/225 would be an appropriate level to focus on if this scenario is accurate.

If that area holds as support, a move back toward “neckline” resistance, which sits at 245, should then emerge. After that, a solid break above 245 would then target an extension toward a “measured move” objective of 292.

Although there are a number of analysts who expect General Motors’ decision to idle 13 assembly plants for up to 11 weeks this summer to reduce demand for base metals, energy usage and, of course, the need for workers, there are a number of observers who suggest the market will look further out the calendar year for prices to rise. Diminished mining production, an expected decline in energy rig counts and a reduction in agricultural plantings, it is argued, will likely offset the current economic slowdown. Massive global stimulus and an extraordinary expansion of a number of Central Banks’ balance sheets should also contribute to commodity bullishness. An expected decline in the dollar index would also support a bullish outlook on commodity prices if dollar begins to slide lower over the next few weeks.

In any event, technical analysis suggests that the development of a bullish reverse Head & Shoulders pattern on daily charts will likely result in a move up to the 290/292 area on the CRB Index over the intermediate term.

http://www.ogmarkets.com

by Jim Donnelly, Olson Global Markets

OK. The “stress test” has come and gone with the S&P 500 Index moving sharply higher in its wake as clarity regarding banks has gotten a lot less opaque. Sure, there is plenty of capital to be raised, but would-be investors seemingly know where they stand now with the fear of “nationalization” being taken off the table for at least the intermediate term. Adding to the giddiness is the latest employment data which suggests that the jobs picture is, you know, “less bad”. Beautiful! Now what?

There is no doubt that the rally since the March 6th 666.79 low has been powerful. Further, this rally has not given buyers, let alone traders with “short” positions, much of a chance to “buy in” long positions or to “cover up” shorts which has clearly added to its upside thrust. Still, there must be a point at which some profit taking, or fundamental reassessment has to take place.

From a technical perspective, it looks like that “point”, which is much higher than Friday’s 929.23 close, sits near the 995 area. That’s the point where the battle between bulls and bears should truly escalate. At first blush, the 995 level should prove to be a big challenge to rise above, unless the fundamental economic set-up shows reason for better than expected or, perhaps, faster than expected improvement.

Weekly stochastic studies on the S&P 500 Index are currently sitting in the mid-90’s which is rarified air for this measure during normal times. That said, we all know that these are not normal times and that fact will likely keep the prospect for a test of the 995 area alive over the next few weeks.

There are some developing negatives to keep an eye on, however. A steepening yield curve with 10-year treasury notes out to 30-year bonds giving up a lot of ground last week amid supply concerns. The CRB commodity index pushing to a year-to-date high of 243.23 was another “fly in the ointment”. Of course, 243.23 is a far cry from the CRB Index’s 52-week high of 473.97, but it is still reason for concern particularly since the CRB Index appears to be forming a bullish reverse Head & Shoulders pattern that targets a move up to roughly 290.

In any event, don’t be surprised if the rally keeps going for a while longer. If there is a surprise, it would be that the S&P 500 stages a solid break above 995. From our vantage point, that probably won’t happen near-term without a major correction lower taking place well before.

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by Jim Donnelly, Olson Global Markets

With a 15% to 20% reduction in demand for electricity and other power needs, the Dow Jones Utility Index already suffered a 48% plunge from its January 11, 2009 high of 555.71 to the 288.60 low set on March 9th. Since then, it has rebounded by 18.5% to Friday’s 342.20 close.

The question is whether the 288.60 “low” set on March 9th was THE “low”. If limp economic activity was not enough to worry about, serious concerns over “cap and trade” issues have added another negative dimension to the utility sector. If implemented “cap and trade” would act as a tax on carbon emissions which would likely result in higher utility costs to consumers, and squashed profit margins to providers.

Other factors also cast a cloud over the prospects for utility production. Levered up balance sheets, which are plentiful in this arena, are troubling to investors since the ability to “roll over” debt at maturity could become a threat, particularly in the current market environment.

Increased concerns over consumers’ reaction to the prospect of higher utility costs, on the other hand, could turn “cap and trade” into a political nightmare and force a very important “re-think”. Another positive circumstance for utilities should come from the “lagged effect” of huge fiscal stimulus that has already been set into motion. That “effect” should “kick in” later this year which, in theory, should help stem the decline of economic activity and provide a floor for utility usage.

Technically, the long-term chart of the Dow Jones Utility Index suggests that it may have found support at 288.60 where long-term “channel bottom” support sits (in blue). In addition, “cross” trend line support (in green) intersected at 288.60 as well. Lastly, the decline from high to low came by way of an Elliott 5-wave structure. If that assessment is correct, a minimum 38% retracement up to 393 should continue to unfold. That would represent another 15% move to the upside from here. Bullish technical divergences support such an outlook over the intermediate term. Higher levels are possible particularly since “mid channel” resistance sits in the 450 area. Still, a 15% extension higher seems to be a reasonable expectation…for now.

http://www.ogmarkets.com