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Bullish signs from the "belly of the curve"

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I can't remember what day it was, but a well know bond fund manager said not long ago that Treasury bulls that wanted to seek out safety in Treasuries should stay in the "bell of the curve" and the 10-year Treasury as the "wings" (5 and 30 year) held the most risk.

By coincidence, late yesterday I pulled up a chart of the 10-year YIELD and there it was! A potential reverse head/shoulder pattern in the YIELD. I was looking for some type of "technical pattern" or something that might help my try and confirm just what the heck might have stocks, which have been stronger than my expectations, continue to move higher.

Today's economic data, which I still don't see as overly bullish, but understanding the MARKET tends to look ahead, has bond traders doing further selling today and giving some technical confirmation in the 10-year YIELD that we may see further selling in Treasuries in the weeks to come.

For those like me that believe the bond market is the "cash register" for the equity markets, the selling in Treasuries gives the impression that bond bulls either see some type of risk in holding lower YIELDS, or see greater reward potential in other investment vehicles.

10-year YIELD Chart - Daily Interval

Last night we had to call the technicals in the 10-year YIELD as POTENTIAL as there was no break of our identified neckline. I used the "rounded number" of 41.50 or 4.15%. Today's bond MARKET reaction to the economic data was to sell the 10-year enough to have YIELD breaking above the neckline. For those that use the reverse head/shoulder pattern to derive a potential objective, the calculation hints at a YIELD objective of 4.499%, or "rounded number" of 4.5%. I also like, I mean REALLY like how the "fitted" retracement really seems to not only "match" how bond Traders may have been trading this bond's YIELD, but how nicely if "ties" in with the reverse head/shoulder calculation objective.

I can also do some "crazy" things with this retracement. Let's say I "think" that a higher YILED to 4.5% or 80.9% retracement might tie in with stocks. Now, I need to understand that for whatever reason, this bond's YIELD is not as high (based on October relative high) as stocks are. Why is this? Maybe that bond fund manager that said the "safest place to be" was in the belly of the curve was correct, and bond investors have tended to stay in this bond, keeping YIELD below the October highs. If so, then the bond market becomes the "confirming" or rising tide that would continue to fuel higher prices in stocks as cash frees up from the bond market. But let's get a little crazy and try to tie in retracement with an index.

NASDAQ-100 Index Tracking Stock - Daily Interval

In Tuesday evening Index Trader Wrap at OptionInvestor.com, I profile a bearish trade in the QQQ, looking to leverage off resistance of $26.75 with a tight stop and targeting $25.00 for a short-term trade. As you can see, I was WRONG!

Now what I'm doing, since the QQQ proved it could break above that resistance on a meaningful basis is "rolling up retracement, but using the 10-year YIELD action to help benchmark some tie points. I want to take retracement from the LOW, and then similar to the "neckline" and 50% retracement of the 10-year YILED, tie it into the QQQ. Since I deemed $26.75 as my key resistance level, it makes sense to me to tie 50% retracement at that point in the QQQ.

While I can't say with certainty that a 10-year YIELD trade at its 80.9% retracement will have the QQQ trading its 80.9% retracement, for a QQQ bear, that's alarming!

Now... one word of caution in the QQQ right now. According to www.stockcharts.com, the NASDAQ-100 Bullish % ($BPNDX) is currently showing 70% of the stocks having a point and figure buy signal associated with its chart. This is now a more "overbought" condition and represents a higher level of risk to bulls. Don't take this wrong. This indicator can go all the way up to 100% and has reached levels of 90% historically. Just use it to know that there's risk for bullish traders.

One target identified in last night's index trader wrap was the 200-day SMA and we perhaps get some correlative near-term resistance there, with the above "fitted" retracement at $28.38. For those bulls that may have been holding QQQ long from lower levels, that may be a level where those bulls look to leg out of some bullish positions, take some profits off the table. For now, bulls will be playing upward trend and 50% retracement of $26.75 as a near-term support level, with very good support forming now at $25.00.

Jeff Bailey

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