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TNX.X: Both Sides

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The Dow Jones Industrial Average ($INDU) finished higher in the three sessions prior to today. The 10-year Note Yield (TNX.X) finished higher in the three sessions prior to today. Obviously there's been a positive correlation between yields and stocks in the recent past. To solidify that observation, both the $INDU and TNX.X were lower at the time of writing.

In the past two weeks, the TNX.X reversed after a sharp drop. The rebound in yields has been driven by a growing belief that the economy is rebounding on the heels of positive economic data and that the Fed is nearing a hawkish stance towards monetary policy. The bond market is currently discounting an increase in the Fed Funds rate starting sometime this summer. Today's weakness in yields was most likely a reaction to the stronger-than-expected housing report earlier this morning.

The TNX.X ran up to the 51.25 level last week and hit 51.21 at today's high. In order for the recent trend in the TNX.X to continue, the yield will have to work through overhead congestion between 80.9 percent retracement (A) at 51.45 and resistance at 52.00. A breakout above the 52.00 level would be a bullish development for stocks in the short-term.

TNX.X Bulls - Daily

Conversely, there's the potential for an ascending head-and- shoulders in the TNX.X. If completed, the pattern may portend strength in bond PRICES and consequently weakness in stocks. The right shoulder of the pattern was traced on November 27 at 50.77, the head on December 17 at 53.85, and the current level as the right shoulder. The neckline is ascending and currently rests between 48.50 and 49.00. Though a significant distance below, a breakdown below the neckline would have negative implications for stocks.

TNX.X Bears - Daily

If you're a bull or bear in stocks currently, take a look at the TNX.X as it relates to your market view. A breakout above 52.00 could provide ample liquidity to carry stocks higher; a reason for bulls to get aggressive and bears to manage risk. On the other hand, the potential for a head- and-shoulders top in the TNX.X could have bulls more conservative in selecting positions and bears getting aggressive.

Eric Utley
Option Investor

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