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Session looks bullish, but still advise caution

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We've been more than "bullish" in this morning's market monitor as the Dow Industrials traded the $9,950 level and set off a triple-top buy signal on our point and figure chart and that now has the longer-term bullish vertical count hinting at $10,700.

Treasuries are seeing some meaningful selling as the 10-year YIELD ($TNX.X) rises to 5.019%, but the move here is right at a short-term downward trend and not indicative of a rush out of bonds. Regardless, despite recent "market worries" in regards to accounting and potential terrorist attacks, we haven't seen market participants rush into bonds. Current action still hints of some uncertainty and lack of true conviction toward the bond market. This may also be a mirror image of things as it relates to stocks, so caution for traders (bullish and bearish) is still advised.

10-year YIELD Chart - Daily Interval

Some of the bond market mavens are beginning to factor in a Fed rate hike in June for Fed funds to rise a quarter point (Fed tightening) to $1.75% from the current 1.5% level. A Fed tightening would have Treasuries perhaps being less attractive should the Fed tighten. Still, one understands that a 5.019% YIELD is still well above the 1.75% level and if the market perceives stocks as "too risky" may still be willing to settle for the security of the U.S. Treasury and be willing to wait for the 5% income, instead of taking the risk in stocks. What I think equity bulls want to see is continued selling in the Treasuries. Not necessarily as a sign that the Fed is going to be raising rates down the road (the Fed raises rates to try and stem capital liquidity and economic growth to keep a lid on inflation), but to free up cash that could flow to equities.

One thing I'm seeing in the 10-year YIELD chart is that the 10- year YIELD is making a 3rd attempt at a rally above its rounding 200-day moving average. In essence, this is a short-term DIVERGENCE from last summer when this YIELD made two attempts at a YIELD rally (selling in the bond) but failed miserably as market participants gobbled up the higher YIELDS. As you can see, there is still a lot of work to be done for us to think that bulls have clear sailing, but current observations are that things look much better than they did last July and August.

Later today we'll discuss some of the things that are taking place in the Dow Transportation Average (TRAN) that is still hinting at bullishness. The triple-top buy signal given today in the Dow Industrials, and try and combine some bullish percent data that hints of a trading rally for bulls.

Jeff Bailey
Senior Market Technician
Option Investor

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