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S&P 500 tracking 10-year YIELD as planned

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Last week we turned bearish the S&P 500 and the SPDRS (AMEX:SPY) as we felt a buying spree in Treasury Bonds and the 10-year YIELD ($TNX.X) might leave this broader market index vulnerable to a near-term shortage of cash to drive stocks higher. So far, the 10-year YIELD action is tracking as planned as we've gotten our test of the rising 50-day moving average. Bears aren't out of the woods yet as retracement support has come into play and there is still a lot of work to be done for further downside action to present itself.

10-year YIELD chart - Daily Interval

We wanted to monitor our scenario for a lower 10-year YIELD ($TNX.X) test of the 50-day and check our scenario that the S&P 500 (SPX.X) would also test its 50-day MA. So far, the two are tracking identically and bond YIELDS look to have helped us set up the bearish play in the SPDRS (AMEX:SPY) from last week.

S&P SPDRS (AMEX:SPY) - Daily Interval

Just as the 10-year YIELD has tested its 50-day MA yesterday, the SPY has tested its 50-day MA today. It was the action in the bond market last week that had us turning somewhat bearish on this broader market security and profiling it in our intra-day commentary as a short. The bond market action along with the inability of the SPX to break above the 1,175 level made for a good risk/reward short play. We will also note the bullish percent for the S&P 500 currently ready 68%, which is very close the to the "overbought" level of 70%. These three technicals give hint that bulls are playing some defense and that bears may are starting to implement some bearish strategies. Bears will want to keep an eye on the bond YIELDS. Their greatest fear is that money will eventually rotate out of bonds and back to stocks.

One thing we want to monitor is the "rate of change" or aggressive buying in the longer-term Treasuries. Today we're not seeing an "aggressive" move toward the 10-year YIELD. The aggressive move came on Thursday and Friday of last week. This has me thinking it is way too early for bearish equity traders to be complacent. Bullish equity traders need to be cautious and have some fairly tight stops under their trades.

Sector strength today is found in the Morgan Stanley Healthcare Providers Index (RXH.X) +1.97% and the Utility Sector Index (UTY.X). Sector weakness is broad with the CBOE Internet Index (INX.X) -4.6% and the Wireless Telecom Index (YLS.X) -4.15%.

Jeff Bailey
Senior Market Technician
Option Investor

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