NEW YORK (
TheStreet) -- As the U.S. approaches its debt limit, financial markets are preparing for both default and resolution.
In years past, anything involving government cooperation has come down to a last-second decision. There is no reason to believe that won't happen again this year as well.
The issue is that probability is our only form of measure. That causes patterns to develop that could trade in either direction. The patterns below in major U.S. assets will be analyzed for both potential upside and downside moves.
The first chart below is of
iShares Barclays 20+ Year Treasury Bond
Treasuries raced higher in early September due to the risks of Syrian violence and potentially less-than-expected tapering.
Prices spiked as the
kept its stimulus program intact, but have channeled lower in a volatile range since.
Markets are now hung up on every new piece of information released from the government. When the sentiment is positive, bonds sell; when sentiment is negative, bonds are bid higher.
The current pattern on the daily chart could turn into either a bull flag or continue to channel lower.
If volatility remains elevated as politicians wait for a last-second resolution and the government remains shut down, expect Treasuries to break out higher in the next few days.
Resolution to the shutdown, however, could lead to the default premium diminishing quickly and bonds pushing lower toward yearly lows.
The next chart is of
SPDR S&P 500
. Equity indices have been hurt by the debt-ceiling squabble.
The long-term trend remains higher, but a default could be disastrous for companies worldwide. Borrowing rates could spike as U.S. bonds would lose their safe-haven status.
Prices are at long-run support levels and will move either higher or lower with increased momentum depending on what happens over the next few weeks.
The default premium priced into financial assets has weighed down equities, but the removal of that weight could lead to a strong push off of support.
On the other hand, continued volatility could lead to a push lower through long-term support levels.
Financial assets are at the will of the U.S government, and politicians' decisions over the next few weeks will determine the future direction of price movement.
At the time of publication the author had no position in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.