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Ten-Year Trouble

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Treasuries were mostly lower going into the close of trading Thursday, but remained well off of their lows of the day. The benchmark 10-Year Yield (TNX.X), which moves inverse to price, was fractionally higher to 4.855%.

Positive economic data lifted the prospects for economic growth as the government released better-than-expected fourth quarter gross domestic product (GDP) numbers. Separately, the Chicago purchasing managers index handily beat estimates, rising to 53.1 percent during the month of February. Readings over 50 indicate expansion in economic activity.

Despite the recent positive economic data, inflation fears have taken a back seat thanks, in part, to Greenspan's testimony Wednesday. The lack of inflation fears has helped to keep in a bid in Treasuries, but there may be more at play than inflation.

Using the benchmark 10-year as a guide, there has been a distinct trend in place since January. That trend has been one of lower yields and higher prices in the Treasury market. The decline in the 10-year yield culminated with the completion of a bearish triangle four days ago on the decline below the 4.800 yield level. The .50 box point and figure chart below depicts the trend and bearish triangle in the TNX.X.

TNX.X - P&F

The TNX, without fail, has rolled over from its bearish resistance line since early January. In yesterday's trading, we observed a failure of the TNX to advance past the 4.950 yield level, which would have put it back at the bearish resistance line. But its top out at 4.943 in yesterday's session failed to accomplish the task.

Interestingly, the current vertical count for the TNX is 4.350, which lines up well with its 19.1 percent retracement level using the bracket on the chart below. Moreover, the daily chart reinforces the descending trend in place since January.

TNX.X - Daily

With the recent round of positive economic data, it's somewhat surprising to continue witnessing the yield struggle to move higher. Not even the recent round of corporate offerings have induced a shift from the safety of Treasuries. Without the liquidity from the bond market, strong stocks could have difficulty moving measurably higher, while weak stocks, such as those found in the technology sector, could continue losing ground.

There are several scenarios under which yields continue lower. The accounting concerns, or Enronitis, may continue to cast a shadow over the risk premium in stocks. And the same could be said for military action. Whatever the reason, the inability of the TNX.X to break trend may hinder stocks from advancing measurably higher in the short- to intermediate-terms.


Eric Utley

Tech still has its soft spots

Yesterday and today we've been highlighting some bearish plays in the market monitor as action unfolds in a rather uncertain market environment. We've remained rather defensive when it comes to "technology" stocks and there's still some soft spots to be found and stocks that still look to have some meaningful downside that bearish traders should be considering.

One stock just recently mentioned at $46.37 in the market monitor (see 02:27 PM EST) was Maxim Integrated (NASDAQ:MXIM). We pointed out the relative strength of this stock versus the S&P 500 and the Semiconductor Index was bearish and the stock looks week compared to both. The point and figure chart also shows that of weakness and carries a bullish vertical count of $42. From our bar chart and retracement we see some good correlation with the point and figure chart bearish count that may have traders short/put the stock and targeting the $42 level near- term.

Maxim Integrated Chart - Daily Interval

Retracement taken from the January 2001 relative highs to the April 2001 lows really has a trader thinking that the current retracement has been traded over time by market makers and other market participants. The recent rally attempt on strong volume from the $47 to $51 level came to an end rather quickly and depicts that of an institutional short locking in some gains at retracement support of $47.11, but now that buying looks to have been completed and the stock is heading lower. A trader short the stock will now look for a "sell side bias" from market makers at the $47.11 level as they assess risk to lower retracement of $40.33. We're noting the 10/30/01 close at $43.16 as a relative low that correlates pretty close to the bearish vertical count from our point and figure chart and this would be a near-term target where a bear might look for some buyers.

Trading strategy for a full position would be for a trader to monitor the $43.16 level closely and if achieved look to lock in partial gains at that level and then move a stop down to break- even levels on the remaining 1/2 position. With volume rather light and drying up, the shares of MXIM look to have few bullish defenders and a stock that bears most likely would feed off of.

Traders will use the bullish vertical counts to help understand or assess a longer-term bearish price potential. Stocks don't necessarily achieve these bearish price objective, while some stock actually exceed them. All a trader want to understand is if there may be some time of interest from bears or concern among bulls as a longer-term price objective is considered.

Jeff Bailey
Senior Market Technician
Option Investor

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