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10-year YIELD breaks downward YIELD trend

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The bond market is seeing a good round of selling again today and this has the YIELD on the 10-year ($TNX.X) breaking above its downward YIELD trend (YIELD moves higher with selling in bonds) and breaking just above the falling 50-day moving average. Action here is very similar to that found earlier this spring, when bond YIELDS snapped higher, broke downward trends. What followed from there was a nice rally in stock into late summer. Then, bond YIELDS started falling after their May 18th high and stocks followed those YIELDS lower in the following sessions.

Traders/investors that like to use pattern recognition and recent market history will want to keep an eye on things. Earlier this spring, it took about 8 sessions for YIELD to finally break away from downward trend and stocks to get into high gear. I think a move above the 4.701% YIELD level could have stock looking to try and put in a second leg higher.

10-year YIELD Chart -

I'd expect some consolidation in bond YIELDS near-term based on what took place earlier this spring, but you just never know for sure. I think a MARKET that truly feels the economy is turning the corner and thinks that risk/reward in stocks favors that of bonds could see YIELD move higher still.

Bond YIELDS have risen sharply in the past 4 sessions, with the bulk of the move coming in the past two sessions. This selling of bonds is raising cash. I don't know if stocks actually moved higher ahead of bonds in recent weeks. The October 31st announcement by the Treasury that it would suspend future 30-year bond auctions had bonds seeing a lot of buying for the following two weeks. This seemed to really throw off past correlation between bond YIELDS rising and stocks rising, but that's understandable considering the Treasury's decision. Now we're starting to see a resumption of the correlation between bond YIELD and stock prices.

Crude Oil getting pounded

Energy related stocks are suffering today as the December Light, Sweet Crude Oil futures (cl01z) sell off sharply. Oil is now below the $20/barrel level at $17.80.

December Crude Oil futures -

Crude oil prices falling continues to be a case of "good news / bad news." The good news is for consumers that should see relief at the pumps. The bad news is for equity bulls in the group where cash flows are declining if future production wasn't hedged. There could also be further hint that the global economy is in poor shape and demand just isn't there. Oil is funny in that prices usually skyrocket due to limited supply issues. Either there isn't enough production for demand, or delivery lines are constrained. Then, all energy participants start bringing production back online (takes 3-6 months) and when it all hits, there's oversupply! It's much easier to just monitor the levels.

From the lows in 1999, you could have almost "fit" retracement from the $14.82 level by fitting the 61.8% level at the January 2000 highs. The "result" would have been the 50% at $21.64, 38.2% at $23.25, 19.1% at $25.86 and 0% at $28.47. Now traders have played this market like a piano, right back down the scale.

It's not just stock traders that use the technique of "rolling retracement", commodity traders do it to. It's all about defining levels and assessing risk/reward in the trades. Should oil jump back above the $21.65 level, we might start looking for hints from the crude oil markets that the economy is beginning to strengthen and start consuming the excess supply.

Jeff Bailey
Senior Market Technician
Option Investor

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