The Overnight Reverse Repo Facility Looks to be Bottoming Out
FRED:RRPONTSYD
Overnight Reverse Repurchase Agreements: Treasury Securities Sold by the Federal Reserve in the Temporary Open Market Operations
Money that has been parked at the Fed's Reverse Repo Facility due to the attractively high interest rates the Fed has set for money parked there has been on a steady decline since late 2022, and recently, this year we confirmed a breakdown of a Bearish Dragon, which led to a BAMM move down to complete a Harmonic M-shape.
This then represented an influx of liquidity exiting the facility and effectively hitting circulation, which led to that money chasing assets and commodities. This chasing of assets and commdoities effecctively backed the 2023 Stock Market Rally.
The target I had set for this move was down to the 0.886 of a Bullish Bat and now months later we can see that we came very close to it, but it would seem that rather than getting a full 0.886 retrace we are instead getting a confirmation-styled RSI reaction as price Bounces from the 1.618 Extension, which just so happens to align with an AB=CD formation it's made on the way down.
I see this as an indication that the liquidity will soon stop flowing out from the facility and that liquidity will now begin to flow back to the facility, effectively taking money out of circulation, which would likely result in a decline in asset prices and a decline in the trading of Short Term Debt on the open market, which could then lead to Short Term Yields rising overall along with the US Dollar as institutions once again begin to lock up their dollars in this facility and chase yield rather than assets.
Recently, I have been seeing a lot of weakness in the banking sector. That weakness may act as a catalyst for these institutions to once again park their money with the Fed, just as it did before. As always, my target for an ABCD is back to the Level of C, so we should see this rising back up about 30% before we can start looking for signs of this topping out again.
This then represented an influx of liquidity exiting the facility and effectively hitting circulation, which led to that money chasing assets and commodities. This chasing of assets and commdoities effecctively backed the 2023 Stock Market Rally.
The target I had set for this move was down to the 0.886 of a Bullish Bat and now months later we can see that we came very close to it, but it would seem that rather than getting a full 0.886 retrace we are instead getting a confirmation-styled RSI reaction as price Bounces from the 1.618 Extension, which just so happens to align with an AB=CD formation it's made on the way down.
I see this as an indication that the liquidity will soon stop flowing out from the facility and that liquidity will now begin to flow back to the facility, effectively taking money out of circulation, which would likely result in a decline in asset prices and a decline in the trading of Short Term Debt on the open market, which could then lead to Short Term Yields rising overall along with the US Dollar as institutions once again begin to lock up their dollars in this facility and chase yield rather than assets.
Recently, I have been seeing a lot of weakness in the banking sector. That weakness may act as a catalyst for these institutions to once again park their money with the Fed, just as it did before. As always, my target for an ABCD is back to the Level of C, so we should see this rising back up about 30% before we can start looking for signs of this topping out again.
