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QQQs should test $45

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Throughout the trading session, there have been some signs that a rally is beginning to take hold. We first identified a couple of stocks in the software group that looked strong and took particular shining to shares of Citrix Systems (NASDAQ:CTXS). While many technology bulls are getting used to stocks getting blown back in their face when they appear to be breaking out, so far that hasn't been the case with CTXS. We've also identified the Biotech Index (BTK.X) as a leader in the technology space and there too we're seeing an index take out previous session highs and build on what looks to be a very strong move higher. When a leader leads, that is a good sign that money is continuing to commit to a group and shows confidence in the future. Institutional money has a habit for sticking with a sector until valuations or sector risk becomes too much to handle.

Earlier today we thought the Morgan Stanley Cyclical Index (CYC.X) needed to start showing some strength and get back above an old longer-term trend. In the past couple of hours, we've started to see that group start making a move higher and currently trades above the 546 level. By identifying some groups we want to see strength from we set tests for the market. So far today, these tests are underway and the results are coming in bullish!

Here's a chart of the QQQs and should we continue to see some passing grades from different indexes and stocks we've talked about recently, looks for the QQQs to make a relatively easy run to the $45 level.

NASDAQ-100 Index Chart - last seven months

The QQQs look ready to try and make a run at the $45 level and this might take place before tomorrow's close of trading. In order to do so, I think we're going to need some help from the bond market. Here's one way to look at the YIELD on the 5-year bond (FVX.X) as it relates to retracement and correlating this YIELD with the above chart of the QQQ.

5-year Treasury YIELD chart - last seven months

In the past hour, we've seen a pretty significant rise in the 5- year YIELD and I believe this has something to do with today's building rally. For the rally to continue, equity bulls want to see this YIELD jump and get back above the 47.06 level or 4.706% level. Notice how this YIELD jumped back on May 10th thru the 11th! We can correlate that move with what happened in the QQQ and sessions that followed. For an extended move higher in the QQQ, I feel we need to see the above YIELD on the 5-year hold above the 46.22 level and even try and get up to the 47.89 or 4.789% level. There's only so much money in the market at particular times. That money can go into bonds or it can go into stocks. The last two weeks, it is fairly evident that money has been coming out of stocks and going into bonds, thus driving the YIELD lower. Look for the reversal in YIELDS to give further strength to stocks.

Jeff Bailey
Senior Market Technician

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