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Using bond YIELDS to help make a decision

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Now is a great time to take a look at a bearish trade I alerted traders to over a week ago; a trade that some subscribers may have initiated on Friday is shares of Microsoft (NASDAQ:MSFT) near $59.88. The stock has reached one of our preliminary targets, the 200-period MA, but has yet to achieve our "ultimate" target and fill the gap to $56.25. If I've got a $2 profit, is it time to cover or see if the stock will trade down to $56.25? As I assess the trade (something every traders should do minute by minute or day by day), I'd say I'm now risking a $2 profit to try and make $1.50. Therefore my risk/reward is $2/$1.50.

Microsoft Corporation Chart - 60-minute interval.

It looks like the 200-day MA is the current "support level" that traders and MARKET participants are keying on today. To help make a decision, let's use the bond market to see if it can help us. If we believe a higher yield for bonds is good for stocks, we can use that "observation" to help make the decision for us. This helps bring some "neutrality" to our trading.

10-year Treasury Note YIELD Chart - 60-minute interval.

A quick look at our YIELD chart of the 10-year (TNX.X) shows that an "old" YIELD resistance is looking like support short-term. It wouldn't be out of the question for the YIELD on this bond to move higher to the 50.83 level and that would be higher than its current level of 50.40. If I believe a higher YIELD is favorable for upward moves in most stocks, I could use this information to go ahead and take my profit in a short position in shares of MSFT. If the YIELD on the 10-year moves up to the 50-period MA on our YIELD chart, might not shares of MSFT move up to its 50- period MA?

GSTI Software Index Chart - 60-minute interval.

We can pull even more information from the MARKET, by looking at Microsoft's (MSFT) related index, the GSTI Software Index (GSO.X). Notice the "gap" in this index that also represents what we had identified in MSFT. The index itself is having "trouble" filling its gap and this is a sign of strength. Remember the reason we like MSFT as a short below the $60 level was simply to try and take advantage of a short-term supply/demand relationship that a gap provides. Right now, bond yields aren't cooperating with a bearish trade and since we're seeing some resilience in the sector (GSO.X) we might as well take our profit. Traders that still "believe" MSFT will hit the $56.25 could actually then use a move in the GSO.X above 271 as a very good reason to cover their trade in MSFT. If 271 was to act as support, it should become resistance if the group is suspect over the short-term.

Jeff Bailey
Staff Analyst

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