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Treasuries steady after March ISM data

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I've been doing some work and follow the 10-year YIELD ($TNX.X) very closely this morning and while the major equity indexes have seen a bit of "see-saw" of emotion and provided a dip lower and a reversal back higher, Treasuries have remained rather steady with the 10-year YIELD ($TNX.X) range-bound, and that's exactly where stocks have come back to.

I run tight on my deadlines for the index trader wraps as it is, but wanted to quickly show a 60-minute chart, and perhaps show the "struggle" that many traders are dealing with at this time. It's not just you and I, but many institutional bulls that are trying to weigh the "war with Iraq" uncertainty with positions they hold in equities and Treasuries.

10-year YIELD Chart - 60-minute interval

I like to try and "tie in" some index price levels with the 10- year YIELD ($TNX.X) and try and analyze what Treasuries will tend to do based on their technicals.

On Friday, I profiled a near-term bearish trade in the Dow Industrials (INDU) 8,013 +0.25% when the 10-year YIELD fell just below the 3.9% level (39.00 and "neckline" of head/shoulder top) when the Dow was trading near 8,150. I continue to hold a bearish trade in the Dow DIAMONDS (AMEX:DIA), which is a tracking stock for the Dow.

Then, yesterday I offset that bearishness with a bullish profile in the Dow Industrials (INDU) near 8,017, as the Dow made a move back above 8,000 after a dip lower to 7,975. In essence, I'm rather "neutral" in a Dow position, and begin to work on my 10- year YIELD chart.

Now... I currently have a near-term bearish pattern in the 10- year YIELD ($TNX.X) and the previously identified head/shoulder top, which gives us a 10-year YIELD objective at this time to 3.7%. That ties in "nicely" with our conventional retracement (pink retracement) of 37.10, or 3.710% as a technical level.

In last night's Index Trader wrap, I felt a Dow Industrials (INDU) break below yesterday's low, would have the Dow potentially vulnerable to 7,844. I've tried to "tie in" that level with a 10-year YIELD at 3.7%.

However, the other side of me (the bullish side) can equate a 10- year YIELD of 4.072% (40.72) on the above chart with a Dow Industrials that recently traded 8,500.

While we've seen the major indexes "fluctuate" with the Dow's intra-day range being roughly 80-points, the 10-year YIELD chart above shows that the DAILY and MONTHLY pivots discussed in last night's Index Trader Wrap coming into play this morning, while the WEEKLY S2 level of YIELD support continues to hold, and keeps equities in check.

This morning's release of the March ISM Index came in weaker than the 49.0 forecast, with a reading of 46.2%. While equities dipped quickly to their session lows on the data, Treasuries held rather steady, then found some sellers come in and suddenly equities bid.

Right now, I'd have to say the MARKETS have taken the weaker- than-expected ISM Index data in stride, and really has had little impact on the MARKET in a grander scope of things. However, KEY levels from the 10-year YIELD that I truly believe will dictate market action near-term is DOWNSIDE on a YIELD break of 3.88%, and upside bullishness presenting itself at 3.83% and building above 3.842% or 38.42 on the above chart.

Now... traders that may be following the swing trade model in the market monitor, perhaps understand how difficult it can be to actually try and figure out at what "exact" level a bullish or bearish trade might be initiated. Just understand, that YOU the trader can follow YIELDS yourself and once in a trade (call/put) begin to understand what may need to happen from Treasuries for the trade to continue working in the direction you need it too.

Once a trader perhaps ties in some YIELD action with index targets, they can then better assess risk/reward in their trade and make some decisions as to their continuing to like a trade and staying with it, or moving to the sidelines if they don't like the downside risk.

As I look at the above chart of the 10-year YIELD, I see my near- term risk in equities to the downside, but still rather "limited" IF, and I stress IF, the 10-year YIELD ($TNX.X) would hold a 3.7% YIELD level, then begin a rebound. It's my opinion that a Dow BULL in this 8,000 area as some support underneath, which will be provided by bears holding positions from below that have seen 8,500 in recent weeks. Bulls are at the ready in my opinion, and looking for any type of renewed selling in Treasuries to get stocks back on the move higher.

It still is my thought that traders should be trading lighter positions size with the Iraq war still taking place. I can build both bullish and bearish scenarios for the war with Iraq that traders could argue about for days on end.

Jeff Bailey

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