To The Moon

Markets saw little meaningful volatility during the Mid-Autumn Festival and National Day holiday, giving us a calm and enjoyable break. However, unusual moves emerged once trading resumed. The rebound in crude oil futures deserves the most attention.

The continuous WTI crude oil contract opened at 90.40, reached a high of 93.68 and a low of 88.79, before closing at 92.91. The candle itself was not extraordinary. Its location was what mattered.

My technical model provides a useful framework for tracking this market over time. Crude oil tends to respect key technical levels. This rebound began precisely at the long-term ascending trendline extending from the lows. Prices also held the previous consolidation range between 89.86 and 104.70 :

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What does this mean? Crude oil remains in an uptrend. The seemingly sharp pullbacks have ultimately proved to be range-bound moves.

Candlesticks alone do not tell the full story. June futures still trade at a steep premium to December, leaving the curve in deep backwardation. This near-month premium has barely narrowed. Meanwhile, the diesel crack spread has climbed steadily from early August through October 9. Its latest reading reached 106.935. The spread has broken higher again near historical highs and is now retesting the previous 110 level. The spread structure points to clear physical-market tightness, and that signal is hard to dismiss:

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Taken together, these signals show that the market does not expect crude oil’s uptrend to be derailed by headline noise surrounding Trump’s purported peace talks. Oil remains in a choppy upward trend, although the path is likely to stay volatile. Over the short to medium term, crude prices and inflation expectations may trade within defined ranges. Our strategy therefore focuses on range-bound options structures that can capture time decay.

Sticky Inflation Expectations Keep the Long-Term Outlook Uncertain

The latest survey of U.S. consumers reinforces this view. The New York Federal Reserve’s Survey of Consumer Expectations, released on Wednesday, showed a sharp rise in near-term inflation expectations last month. The one-year measure climbed to 3.90%, while the three-year measure reached 3.25%. Both have trended higher and are near their highest levels in recent years. By contrast, five-year inflation expectations stood at 3.01% and remained broadly flat.

This structure is revealing. Inflation expectations remain highly sticky. Consumers expect prices to keep rising in the near term, although they do not foresee a permanent shift in the five-year outlook. Once that stickiness takes hold, rate hikes return to the policy debate. Could the recent decline in expectations for an October hike reverse? The odds of a December hike now appear higher.

This is why the outlook must be viewed in two parts. Sticky inflation keeps the long-term direction of U.S. Treasuries unclear. If inflation expectations remain elevated, the number of rate hikes stays uncertain and long-term bond pricing remains unsettled. The short-term opportunity discussed below is fully consistent with this longer-term uncertainty. They operate on different time horizons.

U.S. Treasuries: Bearish Divergence, a Channel Breakdown and Extreme Net Shorts

Treasury yields are the key market to watch after the holiday. Both the two-year and 10-year yields have formed bearish divergences. The U.S. dollar shows the same pattern, raising the risk of a short-term pullback.

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The daily chart of the two-year yield makes the signal clearer. The yield climbed from 3.679% to a cycle high of 4.960% within a rising parallel channel. It has now closed at 4.783%, below the five-day moving average of 4.785% and the 10-day average of 4.824%. It has also slipped below the lower boundary of the channel, as highlighted by the red arrow. The Bollinger Band midpoint stands at 4.793%, with the upper band at 4.953% and the lower band at 4.632%. The yield is moving from the upper band to below the midpoint. Put simply, the market is unwinding excessive rate-hike pricing.

For readers less familiar with futures, Treasury prices and yields sit on opposite sides of a seesaw. Rising yields mean falling bond prices. Therefore, when we say the Treasury selloff may be nearing an end after several weeks, we mean the sharp rise in yields is losing momentum. Bearish divergence sounds technical, but the concept is simple. The market continues to make new highs while momentum indicators fail to confirm them. It resembles a runner still moving forward after running out of breath.

Positioning provides an even stronger signal. CTAs hold an extreme net short position in Treasuries, creating strong upside convexity in bond prices. The 10-year Treasury net-positioning measure fell from about minus 12.2 in July to roughly minus 14.65 in late August. It hovered near minus 14.0 in September and remains deeply net short. In the model’s scenario analysis, the green line representing a sharp Treasury rally rebounds almost vertically toward minus 12.2 after mid-October.

This is what convexity means in practice. The more one-sided the trade becomes, the more forceful the covering can be when the market reverses. If yields begin to fall, funds may cover or reverse their short positions. This could amplify the short-term decline in yields. This is not a forecast. It is a mechanical feature of the positioning structure. The shorts are crowded behind one door. Once it opens, everyone tries to exit first.

Gold: The 4,000 Pivot and Three Key Tailwinds

Gold is the key market to watch in the short term, with 4,000 serving as the main pivot. If gold futures fall toward 4,000, a small starter long position could be considered. A rebound above 4,200 could also support a small tactical long, with a stop below 4,100. From a cycle perspective, the current pullback appears close to completion, while 4,000 should provide strong support. Another subtle signal also deserves attention. A breakdown in the inverse relationship between gold and the 10-year Treasury yield would provide further confirmation that gold has bottomed.

Gold has a clearly supportive environment because its performance is closely tied to the U.S. dollar and Treasury yields. Both are now moving in a direction that favors gold.

Start with the near-term dollar outlook. The dollar index closed at 102.030 after reaching a cycle high of 102.530. The Bollinger Band upper boundary stands at 102.822, while the midpoint is 101.126. The index has reached the upper boundary of the two rising parallel trendlines shown in green and has started to retreat. Both the Bollinger Band setup and the rising channel suggest that the dollar could enter a corrective phase.

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Yields have broken below their channel, while the convexity created by extreme CTA net shorts could reverse sharply at any time. As a result, the three forces behind gold’s pullback are easing together: dollar strength, rising yields and bearish momentum. A near-term rebound could be imminent. This view is supported by three independent lines of evidence pointing in the same direction.

Any rebound in gold should be treated as a short-term tactical opportunity. Gold’s broader uptrend remains intact over the medium to long term, but the dollar’s recovery may not be over.

The dollar’s monthly chart tells a very different story. A long-term ascending trendline extends from the 2008 low of 70.698 and projects toward 116.698. Three red ellipses highlight the sharp rally in 2014 and 2015, the 2022 surge to 114.480, and the current move. A question mark appears beside the third ellipse.

That question mark represents the caution investors should retain. On the monthly chart, the dollar still has the potential for another sharp upward surge. Much will depend on the Federal Reserve’s resolve to raise rates. If the Fed withstands political opposition and pressure from Trump, it could deliver more rate hikes than the market expects. Such an outcome could trigger a powerful dollar rally. This risk helps explain the recent weakness across major non-dollar currencies, including the renminbi, euro and yen.

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For the coming week, one strategy is to wait for gold futures to break above their 20-day moving average. Investors could then sell puts with strikes below 4,000 and close the position immediately if gold falls back below the average. Another approach is to go long gold futures after the breakout, with a stop triggered by a move below the 20-day average. The moving average acts as an on-off switch, signaling when to enter and exit.

The outlook for U.S. equities is more complex. A sharp near-term selloff now appears less likely. Based on Wall Street’s expectations for the coming earnings season, companies such as Micron and Nvidia should continue to make an outsized contribution to overall S&P 500 earnings growth. Even if yields rise, put-selling strategies may remain viable over the next two weeks.

Semiconductor and AI stocks sold off last night following negative news that OpenAI’s revenue had fallen short of expectations. Nvidia also formed a bearish breakdown from a topping pattern. Even so, the S&P 500 closed at a key resistance level. The index therefore remains in a high-level consolidation pattern and is still building a trading range. We can wait to see whether it closes the week above the key 7,820 resistance level. For now, staying on the sidelines is the more prudent approach.