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Bond Yields surge, but broad markets aren't following!

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The markets look like they're getting defensive during Mr. Greenspan's testimony on Capitol Hill and traders should be alert and taking action. In the past month, a higher yield in the bond market has been very good for stocks. Today we're seeing a short-term deviation from that pattern and this should have traders alert. A quick glance at your indexes will show the Drugs (DRG.X), Healthcare (HCX.X), Oil (OIX.X), Forest Paper (FPP.X) and S&P Chemical (CEX.X) all trading to the upside. These are the exact groups that benefited at the NASDAQ's expense late last year. Traders that have some nice gains in technology stocks should be snugging up there stops!!!! I can't stress this enough!

Deviation from past month's pattern

Yesterday I "planted the seed" that the Fed might not be as aggressive in cutting interest rates and this short-term deviation of pattern (higher bond yields not fueling a higher NASDAQ) has me concerned. It is much better to be locking in nice profits in technology stocks if stops are triggered than to watch them get flushed down the drain. As traders, we can always get back on board, but we understand that the NASDAQ has rallied nearly 25% in the past three weeks and there are some big gains in a lot of technology stocks from those levels. Just as we saw some rotation out of the DRG.X, HCX.X, OIX.X, FPP.X and into technology, we could see rotation back out of technology and into the defensive groups. Simply monitor your trends with your stops underneath. If you're long a $70 technology stock and your upward trend in at $60, be cognizant that the stock could pull back that amount, if not more.

NASDAQ Composite Index Chart - 60-minute interval.

Our observation yesterday that an "old" upward trend was acting like resistance now looks to be an accurate observation. That was the "first sign" of trouble. Next sign of trouble would be the 50-period MA (thin blue) at 2,755.

S&P 500 Index Chart - 60-minute interval.

The above chart is "drawn up" just as we did yesterday with the NASDAQ Composite. I'm showing two different trends. They are not drawn to confuse traders, but to drive home a point that we are seeing some short-term weakness in these two indexes. Our blue upward trend is more aggressive (steeper) than our green upward trend. This is not a cause for "panic", but simply an observation of weakness. If you've planned your trades properly, you're sticking with your stops in bullish trades or simply moving them higher.

Bond yields all over the place!

When Mr. Greenspan began his testimony earlier this morning, bond yields surged. In the past hour, they've come back down. These are fairly "wild" gyrations in the bond market and that spells uncertainty. During times of "uncertainty" markets can get wild as "emotion" enters the picture. This is when it is paramount that traders remain calm and rational and why it's important that you have a plan in place to act not only offensively, but defensively. While we've been rather active in the technology markets the past couple of weeks, yesterday and this morning we talked about the Drug Index (DRG.X) and Oils (OIX.X). We're trying to give traders some ideas they can incorporate into future plans, but those plans need to be developed by the subscriber.

Jeff Bailey
Staff Analyst

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