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Bull market or "mad cow" disease\?

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Bonds are seeing a good round of selling today and this action near previously identified YIELD support (see last night's market wrap) looks to have the stock market back in a very bullish phase and strong trading rally. Today's action may be the final straw that breaks the bear's back and has them truly wondering if this is really a "bull market" or simply a case of "mad cow disease."

10-year YIELD Chart -

Before stocks opened for trading subscribers saw the higher YIELD in bonds as did many market participants. From here, we'll want to simply monitor the levels. For a nice trading rally to continue, look for the YIELD on the 10-year to rise back near the 61.8% retracement level near 4.983%. But don't forget to 5-year YIELD! Remember, the 10-year is "riskier" than the 5-year, so we need to monitor other bonds as well.

5-year YIELD chart -

While the 10-year YIELD has broken back above a retracement level, the 5-year YIELD has not. For me, this is still a sign that equity bulls need to be disciplined in their trading and not euphoric. It makes "sense" that the 10-year YIELD would break above a retracement level first as it is a "riskier" bond that the 5-year. Just as the 5-year YIELD was the first to start breaking levels to the downside and turn us cautious toward stocks, it makes sense that the 5-year YIELD would be the last (between the 5-year and 10-year) to break a level of retracement YIELD resistance. In essence, on an upward move in YIELD, the 5- year will most likely serve as the "wave" that would continue to push a move higher. The 10-year YIELD acts more like the "surfer" at the front of such a wave. Right now, the "surf is building" for a continued rally in stocks, but has not crested yet. I want to see some type of breaking of a resistance level to give me further hint that we're truly dealing with a "bull" in stocks and not a "mad cow."

Dow 10,000

Currently, the Dow Industrials (INDU) are trading above the 10,000 level, which we've pointed out before as "psychological" resistance. Many bullish trader's will want to see a close above the 10,000 level at session's end. Failure to do so may weigh on bullish traders minds as a level that is just too tough to get through. However, a close above the 10,000 level (the more the better is what a bull thinks) will then weigh heavy on a bear's mind. With the Dow Industrials back above 50% retracement of 9,892 a bear was "hoping" that 10,000 would protect him. Current assessment of risk for a bear now becomes 61.8% retracement at 10,324 (this is a bull's near-term target).

Lots of upside alerts

This morning, my trading station was popping out upside alerts that I had set on many stocks. One stock I like as actionable right here at the $12.08 level for bulls are shares of XM Satellite Radio (NASDAQ:XMSR). It's a stock we mentioned in Friday's commentary for a move above the $12.04 level. A more cautious bull could establish 1/2 position long here, then look to add on a trade at $13.05 with confirmation from the bond market. A trade at $13 would set up a "triple-top" buy signal on the stock.

Jeff Bailey
Senior Market Technician
Option Investor

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