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A day of rest

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The broader market averages look to be taking a rest today as stocks edge lower. Today's news that an Iraqi dissident group occupying Iraq's Embassy in Berlin, calling for the overthrow of Saddam Hussein, has equity investors on edge and some investors rotating some cash back into bond.

The past couple of days, we thought a break above the 50-day moving averages would be a technical sign of bullishness for bulls, and yesterday's breaking above the 50-day MA's in the major market averages certainly had some bears on the run and further covering short positions.

However, if there was one thing "missing" from a bulls perfectly devised game plan, it may have been a strong round of selling in the Treasury markets.

One of my "benchmark" dates to the firm break above the 50-day moving average which had stocks extending last fall's rally off the September lows, was the November 5th date. It was November 5th date that we saw many of the major market averages make a firm move higher and ended up having stock extend their gains late into the year. This November 5th date now becomes an area of interest where a trader begins correlating what was taking place in the Treasury bond market.

Last week the shorter-term 5-year YIELD ($FVX.X) 3.25% was able to generate a "buy signal" on its point and figure YIELD chart, so I'm going to start with some correlation at this "safer" Treasury as it relates to a comparison with the 10-year ($TNX.X) 4.172% and 30-year ($TYX.X) 4.982% YIELD charts. It should be noted that neither the 10-year or 30-year YIELD charts have given any type of "buy signal" on their YIELD charts, so equity bulls are still cautious as to the prospects of further amounts of cash rotating from the bond market toward stocks.

However, if we benchmark from the November 5th date, we see that the 5-year YILED ($FVX.X) did see some buying for a couple of days after the major market averages broke above their 50-day MA's and it wasn't until a couple of sessions later that this bond's YIELD firmed, then found a rather extreme amount of selling on November 13th to 16th, which then seemingly helped extend stocks higher.

5-year YIELD Chart - Daily Interval

Yesterday's 5-year YIELD rally stopped dead in it tracks at our 34.55, or 3.455% YIELD level of retracement and ended the session relatively unchanged. Today's news out of Berlin has most likely had short-term investors moving back to the safety of this bond's YIELD and perhaps locking in some gains in equities.

If we look back at the November 5th date, we see that the 5-year YIELD did reverse that day from a higher YIELD (selling of this bond early in the session) to close marginally lower (very similar to yesterday's action) then fall lower over the next couple of sessions, retesting its lows, then edging up and eventually "rocketing" higher from November 13-16, as if to then put in place enough cash to have stocks trading higher into the end of the year.

For bullish and bearish equity traders, this bond's YIELD may be the near-term "indicator" to be watching near term. Equity bulls most likely look for DUPLICATION to the past, while a bearish equity trader would want to see DIVERGENCE from the past.

So far, the equity markets appear to be DUPLICATING the past pretty close to the late October and early November time periods, and one would have to say (based on current observation) that the Treasury markets are doing the same.

We are seeing quite a few "inside days" being generated today as stocks trade "inside" of yesterday's range.

One stock that we've talked about recently that is an obvious candidate in my book for some profit taking is shares of IBM (NYSE:IBM) $80.41 -2.52%. With a lower YIELD in the Treasuries, there are undoubtedly some shorter-term bulls looking to book profits in the stock after its recent run from $75. In essence, book short-term gains here and ask question's later, looking for re-entry back near $75 should such trading take place.

In last night's market monitor at OptionInvestor.com, I talked a little bit about how the smaller caps as depicted by the Russell 2000 Index (RUT.X) 397.56 -0.92% were lagging the bullish move technically, as it relates to this indexes 50-day MA, which is still above at 416.

While not overly outperforming today, it is notable that this broader market average is holding up slightly better (-0.92%) compared to other averages that did break above their 50-day MA's in recent sessions. For example, the narrower Dow Industrials (-1.79%), S&P 100 Index (-1.93%), S&P 500 Index (-1.91%), NASDAQ- 100 Index (-2.19%) and NASDAQ Composite (-1.61%) and NYSE Composite (-1.66%) all exhibit weakness.

Commonality is shared between the NASDAQ Composite (COMPX) and NYSE Composite (COMPX) as it relates to the Russell 2000 Index (RUT.X), and may hint that today's action is indeed profit taking in the larger capitalized stocks that have perhaps "outperformed" in the recent upside move. Remember, there are both NYSE and NASDAQ Composite listed stocks in the Russell 2000 Index.

I'll be keeping an eye on the 5-year YIELD ($FVX.X) rather closely in coming sessions. A further upside move in equities may well come from a break above the 3.455% YIELD level, which just wasn't broken yesterday (thus good reason to take profits in stocks that may have moved a little too much) and alarming alert for weakness in stocks, should the 5-year YIELD DIVERGE from past and take out its recent low YIELD of 3.027%.

Jeff Bailey
Senior Market Technician
Option Investor

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