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One, two, three strikes you're out....

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The major indexes continue to show some mixed trade with the NASDAQ-100 Index (NDX.X) 1,062 +0.86% and broader NASDAQ Composite (COMPX) 1,403 +0.9% holding gains on technology bullishness from Intel (NSADAQ:INTC) $18.18 +6.15% and Microsoft (NASDAQ:MSFT) $25.33 +2.8% gains, while the NYSE Composite (NYA.X) 4,962 -0.6%, S&P 500 (SPX.X) 886 -0.5% and Dow Industrials (INDU) 8,325 -0.9% see a negative trade.

Today's trader certainly has the look of short-covering in technology stocks. The reason I say this is that this is a "group" that has been somewhat of a laagered in the recent week relative to the Dow, SPX and OEX, and it is most likely a "lack of disappointment" from Intel and Microsoft earnings that has some shorter-term bears active in today's trade.

One supportive "argument" for today's gains in tech being short- covering related, is that Treasuries find buyers for a second consecutive session with the benchmark 10-year YIELD ($TNX.X) 3.946% slipping lower, and now falling into a "zone of YIELD support" that becomes near-term important for traders to be monitoring as it relates to cash starting to find its way back toward bonds in a more "defensive" type of fashion.

Here's a look at the 10-year YIELD ($TNX.X) chart with 60-minute bars. From today's economic data, I would have to say it was the March Building Permits data that came in below consensus and is a FORWARD looking number, that may have had "smart money" doing some buying in bonds yesterday in a more defensive type of trade. Now that we've got the "news" any continued buying in this bond most likely would have equities at risk. However... should the bond market negative views from the building permit data be somewhat offset by a "lack of disappointment" from some earnings that have been reported, in which is looks like analysts have way undershot some earnings expectation, then any renewed selling back into Treasuries has stocks poised for an advance.

10-year YIELD Chart - 60-minute interval

I'm not going to say that the "triangle" or "wedge" showing up in the 10-year YIELD chart would be similar to the discussion we had in the Dow Industrials point and figure chart, but for a shorter- term trader in equities, the "wedge" formation showing up in the 10-year YIELD and its MACD Oscillators, which have mimicked the 10-year action, also hint that the bond market isn't quite sure at this point what to be doing.

Today's trade has seen buyers in the 10-year YIELD, and I think it rather safe to say that the Dow, SPX, OEX seem to reflect what we noted in yesterday's bond market action.

While the 10-year bond finds buyers again today and has YIELD falling back into a "zone of YIELD support" shorter-term equity bulls really would want to see YIELD get back higher from these levels. We can see in the 60-minute chart, that there have been some little "b" (April 8) and "P" (April 2) patterns form at the 3.954% and 3.937% YIELD levels. While I felt yesterday's bond market trade advised caution to bulls, I would further express that caution on a move below the 3.937% level.

In play right now may well be just a "technical fill" of a gap from April 10 to 11. Bond traders aren't that different from stock traders. However, a break much below the 3.937% would have our WEEKLY S1 YIELD support of 3.885% (thick green line) then in play. If bonds are going to find further buying to drive YIELD lower, then the supply/demand side of me sees stocks at risk.

Dow Industrials ($INDU) Chart - 60-minute Interval

One thing I've noted the past couple of years, is that rebounds from lows when the bullish % became "oversold," some very aggressive bullish trends were developed. The breaks of 1st and second trends weren't necessarily "alarming," but it seemed that the break of a third trend was the break that really had the indexes giving back gains and either challenging or trading new lows. Traders will note that the March lows, DID NOT violate the October lows, and makes for a more bullish perspective longer- term. However, bulls still haven't been able to match the December highs.

In today's 11:00 Update, we looked at the Dow's p/f chart and tried to "envision" a triangle formation in the coming weeks. In that chart, I envisioned a 4-box reversal in the Dow, which would have it having to trade 8,200. A p/f chartist that like to use those charts to get a broader perspective of supply/demand for Dow stocks can perhaps tie in how a Dow pullback to WEEKLY retracement (blue) at its 61.8% level could come into play and how our "strike 2" trend (pink) if broken, could see a decent little 100-point decline.

Traders holding FULL positions bullish in the Dow, may have legged out of 1/4 or even 1/2 positions when they saw Treasury YIELDS fractionally lower this morning, as WEEKLY R1's were probably going to be a challenging level of resistance.

Equity BEARS, which have swung and "missed" about 6 different pitches in recent weeks, are perhaps starting to see some signs of weakness in the intra-day charts as the Dow has followed the aggressive upward trend higher, but begins to find a more consistent "resistance" at this upward trend as the Dow begins to show a series of equal highs, then a lower high (today's trade), but also a series of higher lows. The only "weakness" being the ability to break an aggressive upward trend.

As such, a bearish trader might leg into a trade, say 1/4 position at this point, and look for further buying in Treasuries, while at a level of YIELD support, to find the break that gives an initial move lower to the 8,200.

Then... as discussed in the 11:00 Intraday update, a trader might look for a 150-point rebound in the Dow Industrials back to the 8,350 level (Treasuries get near-term overbought, stocks near- term oversold).

At that point, if things go as we "envisioned" in the 11:00 Update, the triangle pattern is formed. Then the pressure builds and traders look for the "real break."

For me... Treasuries will be KEY, but so are the market internals as depicted by the Bullish % charts. Right now, the bullish % charts, with perhaps the exception of the S&P 100 Bullish % ($BPOEX) which has been showing some fractional internal weakness, all remain in a more BULLISH stage.

Per last night's Index Trader Wrap and discussion of the Market Volatility Index (VIX.X) 25.85 -0.72%, we've basically seen the VIX.X trade a range of 25.10-26.42. The "spike lower" below the 25.66 level of retracement came just as the Office of Homeland Security lowered its terrorism alert to "Code Yellow" from "Code Orange." The major indexes rallied back on the news (volatility fell), but then saw selling into that bullishness. Most likely.. there just wasn't enough cash to extend equity gains.

Jeff Bailey

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