We all know market does not like uncertainty, similarly to how nature abhors a vacuum. When a vacuum occurs, particles quickly flow into the vacuum to fill the space with matter, resulting in explosions. This description appears to be highly similar to market price, as traders exploded following the Italian Election results – sending bond prices to the stratosphere.
T-Bonds and Notes are generally considered risk-free, since US has almost close to zero risk of default (a debatable perception that is best left untouched right now). As such, T-Bonds and Notes tend to rally significantly during times of uncertainty. Investors would rather forgo higher returns to settle for lower returns but lower risks. Hence the rally in US10Y is a very clear indication of fear entering the market. Stock prices corroborate with this belief, with S&P 500 finally breaking below 1,500 and DJIA deeply below 14,000 after yesterday’s fiasco.
Question we should ask is – why such a big reaction? Yes the election results left Italy with no majority Government, however that should not signal the end of times. With no Government, Italy may not be able to continue its planned austerity measures, but that in itself will not bring down the Euro-Zone, as Greece has time and time again failed to make good on their austerity promise. Perhaps a logical explanation is that investors have long been skeptical of current bullishness, but were unable to act upon it until now. The Italian Job provided an outlet for all the pent up bears and they certainly took their chances with this event.
Price has accomplished 2 things on the Ichimoku indicator with this rally – Trading above the Kumo convincingly, and forming a bullish Kumo twist. Also, we’re currently trading back in the rising channel, which will provide interim support against bears.
Ichimoku on the daily chart is less bullish as price is still being kept within the Kumo, though a bullish Kumo twist is currently underway. A more bullish outlook can be formed should price break above the current cloud, but price will simply breakaway by default should it maintain current levels for the next 2 days. 133.0 round number will provide interim resistance, and a break above 133.5 if it happens will open up trading range 133.5 – 134.5 which is also the consolidation zone back in November 2012.
Fundamentally, we need to ask ourselves if the fear will continue. The market overreacting to the news suggest that there are more bears lurking in the corner than we see. However, the recent “outburst” of the bears may have exhausted the last of them as well, which opens up opportunities for the bulls to take over once more. Traders may wish to keep a keen lookout on not just the 10Y but also different tenure of Treasuries for better indication of “fear”. The round numbers for S&P 500 and DJIA remains important too, and will also help give indication of market sentiment especially if the pullback towards the price levels ultimately fail to break on the upside.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.