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A funny thing happened when the bond market closed

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A funny thing happened when the bond market closed

Today's session started out with a "defensive" tone as Treasuries found buying on U.S. dollar weakness. Meanwhile, gold futures bid to contract highs as stocks readied to open lower.

As the session progressed and economic data looked to be somewhat ignored, the major indexes found some footing at their WEEKLY S1 levels support and started to mount a rather impressive recovery.

With just about an hour left in today's equity trading close, stocks had turned lower as bond bulls looked to finish out their session with a strong round of buying and drove yields back to a session lower. For equities, it looked like a route was on for the bears into the close. Then, suddenly, but with plenty of notice, the bond market closed for trading at 03:00 PM EST (the bond markets always close at 03:00 PM EST on full session days), and the equity indexes made one last push into the close.

Get a bond and equity trader in the same room and you'll get different stories from each as to who the better, or should I say "smarter" trader is. A bond trader will tell you that she's got to be smarter as the bond market is twice the size of the equity market and with interest rates and Treasury bond YIELDS at historically low levels, a bond trader has to be very smart when monitoring risk. An equity trader will argue that bonds are a simple instrument to trade as yield is "certain" when the trade is initiated, while equities hold not only greater potential reward, but greater risk with various dynamics or scenarios constantly shifting the hunger or complete distaste for the pieces of paper worth 1-cent par value.

Here's a quick look at how the 10-year YIELD ($TNX.X) traded today. Just remember, a bond's YIELD falls as that bond's price rises. Underneath the 10-year YIELD chart, I've place the S&P 100 Index (OEX.X). Both chart's time interval is 5-minutes. My general preface with the 10-year YIELD is that as YIELD moves lower (from buying in the bond) it depicts a market that is more "defensive" and seeking out the safety of bonds. The different retracement levels on the OEX chart are the same levels we looked at in last night's Index Trader Wrap.

10-year YIELD / S&P 100 Comparison - 5-minute intervals

In last night's wrap, we thought a weaker dollar and buying in bonds (a lower YIELD as a result) might be a signal for weakness in stocks, and that was what looks to have unfolded today. I do believe, but will never know for sure, if the bond market had remained open longer, that the 10-year YIELD might well have broken its days low and carried the OEX along for the ride, with a close at its session low. However, when the bond market closed, the OEX turned higher about 10-minute later and closed right at our 38.2% retracement from WEEKLY pivot analysis.

As it relates to technical analysis, one thing I think traders need to be cognizant of is today's "gap" lower in the 10-year YIELD (I haven't shown extended hours of trade) that may "need" to be technically filled back to the upside. If so, this little area that is void of trading, if filled back higher, could see an "in unison" move back up to the WEEKLY 61.8% retracement level near OEX 436. In times of "uncertainty" like I think the market is in right now, Treasury YIELDS can be a good security to monitor to get a feel for the MARKET's perception of risk as it relates to stocks and bonds.

My thoughts as it relates to the above chart comparison between the OEX and 10-year YIELD is this. As long as the 10-year YIELD remains below the 3.988% level (this is pretty close to past commentary regarding stocks being at risk to lower prices should 10-year YIELD fall back below 4.0% or 40.00) I'm view the MARKET's psychology as more defensive, and therefore would be more bearish toward the OEX below 436.

I have no clue what Secretary of State Colin Powell is going to say tomorrow, but will be keeping an eye on bond YIELDS to try and get a reading on how the MARKET is perceiving risk.

With the U.S. Dollar seeing selling again today, this to me is somewhat of a "lack of confidence" vote from foreign investors in the greenback. Is it the President's Budget that will see rising deficits, or is it a U.S.-lead "war with Iraq" that is causing the dollar weakness?

This is a question I can't answer. If it was a "lack of confidence" type of trade, then I would have thought Treasuries would see selling in combination with the selling in the dollar. But this hasn't been happening. I think the weakness in the dollar has quite a bit to do with "Iraq war" concerns, and why we are seeing money go into bonds, and the money going into bonds for the most part is from U.S. citizens, pulling money out of stocks. After all, you and I don't necessarily sell our dollars to go into bonds, but foreign investors will sell their U.S. dollars to take their money back home.

The S&P 100 Bullish % ($BPOEX) saw a net loss of 2 stocks to reversing p/f sell signals. This has the S&P 100 Bullish % falling to 41% and still "bear confirmed" status.

S&P 500 Index Chart - Daily Interval

The SPX has "whipped" back below this week's pivot of 854.50 and correlative 854.66 level from monthly 38.2% retracement level. The inability of the SPX to close above 861.24 now has that level looking like a firm selling point yesterday, with additional selling today. As such, I'd look for FIRM resistance to be building at SPX 854 and WEEKLY "max target" of 826 to be in play by Friday as lower Bollinger Band gives some further downside room after last week's test of the lower range. Stochastics on the daily chart are trending higher and this is thought of as "bullish divergence" (when an oscillator moves the opposite of price) and can signal a quick and sudden rebound for price. However, as we noted last week, we thought we might be on the lookout for stochastics to approach the mid-portion of their overbought/oversold zone like they did in mid-December when the SPX looked to stabilize around the 900 level, before the SPX declined further to 872-877 area and then rebounded STRONG to 935. As such, similar technicals unfolding would most likely have bears rather eager to lock in gains on an SPX decline into the 837-826 zone, with MAX decline of 826 this week being the most I would look for.

SPX bears would want to continue to monitor bonds and the dollar and look for bond price strength (lower YIELD) and dollar weakness to have stocks vulnerable.

Today's action saw a net loss of 5 stocks to reversing p/f sell signals in the SPX and has the S&P 500 Bullish % ($BPSPX) falling to 45% bullish and still "bull correction" status.

Dow Industrials Chart - $50-box size

The Dow Industrials (INDU) 8,013 -1.19% traded a session low of 7,934.77 today and didn't quite test its WEEKLY S2 level of support. The Dow has also been finding buyers above the 7,900 level the past 5-sessions and shows a triple-bottom at 7,950. Bears look for a break of 7,900 to lead to WEEKLY S2 of 7,801, which would be just above the lower Bollinger band of 7,750. I'd use the recent double-top buy signal at 8,150 as an alert to strength, but would look for WEEKLY R2 of 8,283 to serve resistance along with the moving lower "Avg," which is the 21-day SMA and middle-portion of the Bollinger Band.

Today's action saw a net loss of 1 stock to a reversing p/f sell signal in the Dow, which has the Dow Inustrials Bullish % ($BPINDU) falling to "longer-term oversold" levels of 26.67%. Again, levels above 70% are deemed "overbought" while levels below 30% are deemed "oversold." The more narrow Dow Bullish % has had a tendency to fall to levels of 20%-3.33%, but a lot of risk has been removed since late November's 72% reading (red B on a p/f chart is early November, while red C is early December).

NASDAQ-100 Tracking Stock (QQQ) - Daily Intervals

Tonight I'm taking one of our "highlighted yellow" bars of resistance from last night's wrap of $26.00 and moving it lower to mark resistance in the QQQ from $24.49-$25.52. In after-hours trading, Cisco Systems' (NASDAQ:CSCO) $13.20 -2.07% earnings provided some rather volatile swings as the company exceeded bottom line estimates by 2-cents, but revenues were slightly below expectations. CEO Tom Chambers was quoted as saying, "most challenging environment the information technology industry has ever faced."

With the NASDAQ-100 Bullish % ($BPNDX) seeing 2 more stocks generate reversing point and figure sell signals and bullish % still "bear confirmed" at 44%, I view formidable resistance in the Q's between $25.31 and $25.52, with near-term resistance at $24.50. Weekly "MAX target" for bears would be the strong correlation of support from the pivot matrix at/near $23.20.

Here are tomorrow's daily pivot analysis updated levels.

Pivot Matrix

A "daily" level to monitor for support tomorrow is the OEX daily S1 of 424 and correlative weekly S1 of 425. Today's low in the OEX was 424.44, but in its "darkest minutes" found buyers near this level. Other DAILY S1s and WEEKLY S1s are also quite correlative with each other and bears will most likely need dollar weakness and buying in Treasuries to see these levels broken to have a shot at the WEEKLY S2s.

With all of the bullish % indicators showing a growing number of stocks giving reversing p/f sell signals, the market internals continue to depict weakness. The very broad NASDAQ Composite Bullish % ($BPCOMPQ) saw a net loss of 0.46% today and has the bullish % edging lower at 42.16%. It would still take a reading of 42% to have this bullish % reversing back lower into "bull correction" status and following last Thursday's reversal lower of the NYSE Bullish % ($BPNYA). These two very broad bullish % indicators are often the very last to turn up or down in a "cycle" and when they get in unison, act like a "sledge hammer" or large weight in a downward move.

Jeff Bailey



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