Last night I was looking at some charts and found a compelling short/put candidate in shares of Microsoft (NASDAQ:MSFT) should the stock trade the $58 level and create a bearish pattern in the point and figure chart with a spread triple-bottom sell signal. This morning I was looking at the 10-year YIELD to try and get further conviction for a bearish trade in MSFT and here is something I find very interesting.
MSFT's point/figure chart has been bearish since breaking bullish trend at $62, and given a bearish vertical count of $47, this stock looks to have some downside still. For further conviction to lower price, I also have said that a lower YIELD in Treasuries is hint that cash is flowing to the bond market and will most likely starve stocks of cash that would be needed for buying to have their prices rise.
Here is a comparison of MSFT with retracement set at some past relative highs/lows and the 10-year YIELD chart with its retracement also set from recent high/low YIELDS. The correlation is remarkable and hints that a 10-year YIELD break below the 4.81% level could help send shares of MSFT lower. Again, the thought being that there will be little cash available to buy some MSFT.
Comparison of MSFT and 10-Year YIELD Chart - Daily Interval
Both retracement are anchored to the highs found last summer. The base of retracement in MSFT was attached to the April 2001 lows, while the base of the 10-year YIELD retracement was anchored to the recent November lows.
It has been my observation in recent years that a lower 10-year YIELD is caused by buying in this bond, and coincides with a market psychology of fear/concern that stocks don't offer an attractive risk/reward and that market participants would rather settle for a 10-year YIELD that is rather low, while enjoying the perceived safety that its interest payment is backed by the full faith and credit of the U.S. Government.
With that said, I'm thinking a break in YIELD below the 4.81% level could be a sign from the MARKET that it is preferring the safety of the 10-year and willing to forgo the purchase of stocks. If you're a believer in supply and demand like I am, then I'm thinking MSFT could get pounded to its current bearish vertical count of $47. That $47 level also correlates nicely with the retracement bracket and 19.1% retracement near $47.63.
10-year YIELD Chart - 0.50 box
The point/figure chart shows that the 10-year YIELD may be at a critical level currently. If you believe like I do that a lower YIELD in the 10-year is a negative sign for stocks, then we are observing that the 10-year YIELD chart currently carries a bearish vertical count for YIELD (bullish for the bond price) of 4.35%. Hmmmm.... that's also where we have our 19.1% retracement.
You don't think .... "if the YIELD is going lower then MSFT is too" do you? I do and MSFT looks very suspect to lower prices, even from here. Looking at 1/2 position short/put in MSFT at current levels, and look to add on break lower in YIELD, then target MSFT to $50. Stop on the underlying shares of MSFT just above at $64 to begin with, then lower stop should trade work in our favor.
MSFT is the most heavily weighted stock in the NASDAQ-100 Trust (AMEX:QQQ).