Traders that continue to work hard with their technical analysis
may find things from time to time where the light bulb comes on.
Observations made in the past from analysis may suddenly be
confirmed with other techniques they've learned, or have
forgotten about.
In recent weeks, we began trying to make some predictions on how
the 30-year YIELD might act and identified the 5.35% level as a
potential "key level" or "pivot point" for this bond to try and
sniff out where this bond might find selling, and proceeds from
those sales flow into stocks. On Thursday, we witnessed the 30-
year YIELD ($TYX.X) dip below this pivotal 5.35% level and stocks
suffered the consequences. By sessions end however (on Thursday)
there was selling in the 30-year YIELD and it managed to finish
the session with a YIELD of 5.371%. So far today, stock have
been able to come back from yesterday's route and perhaps the
action in the 30-year can continue to help us understand how
stocks will trade as it relates to yield.
Today, I slapped a retracement bracket on the 30-year YIELD chart
and I almost fell out of my chair. Perhaps some other
subscribers have done the same thing, but simply blew off the
correlation of the 80.9% retracement level as a coincidence.
If so, think again as it gives credence to earlier analysis as
5.35% being a closely watched level for buy/sell decisions for
stocks. If not buy bulls, then certainly for bearish traders
looking to lock in gains on short positions. Here's what I'm
talking about.
30-year YIELD Chart - last nine months
A retracement bracket overlaid on the recent highs and lows for
the YIELD on the 30-year YIELD ($TYX.X) gives the trader the
perspective of YIELD and different zones. It's obvious now that
back in March and April, the "zone of distribution" or selling of
the 30-year YIELD took place between the 80.9% retracement and
100% retracement levels. That range as defined by the actual
YIELD of the 30-year bond could be characterized from 5.217% to
5.347% (note how close 5.347% is to previous analysis of 5.35%).
Now what? Let's lay out a scenario for the Fed to be at the end
of its rate cutting cycle. What should bond YIELDS do if that is
the case? They should head higher as "risk" of owning a 5.35%
YIELD is not very good compared to further reward for price
appreciation and the 5.35% YIELD. It would also be an assumption
that the Fed would only be at the end of its easing cycle if
there were signs of economic recovery.
In order to build trading scenarios, one must make assumptions.
A trader should not only make assumptions for the end of Fed
easing and economic growth, but should also make assumptions for
continued Fed easing and economic slowing. How we monitor these
assumptions and attach levels to them so that we can follow the
progress and fine tune the scenario is where the above bond YIELD
chart comes in.
Again... my assumption is that bond YIELD is very important to be
monitoring as it gives us the potential heads up for where money
is flowing (in or out of bond market).
Now, how the heck is this going to help us? I'd argue it already
has for the most part. The YIELD on the 30-year has been
violating retracement level after retracement level since it
broke the 5.77% YIELD (19.1% retracement level on above chart)
and that action has had traders getting less bullish on stocks
with every level broken. If not, it surely should have. Using
past technicals, we're not approaching what could be a
distribution zone for the 30-year YIELD. If the Fed truly is
near the end of its recent easing cycle, then we should expect to
see the 30-year bond YIELD start to head higher soon. With that,
we should also be monitoring some other indicators and indexes
that might give hint of a turnaround.
S&P 100 Index (OEX.X) - last nine months
Notice how nice the 80.9% retracement level on the above chart of
the OEX.X correlates with what we're seeing in YIELD on the 30-
year bond. I've also added some commentary in the chart and
highlighted levels that correlate back to bullish percent data
and levels of significance there. This type of analysis will set
you and your trading apart from other market technicians. Using
retracement to understand levels and using bullish percent data
to understand the market internals for the sectors or indexes
that you're trading within.
I think a breaking of the 5.35% YIELD level on the 30-year bond
is going to be an alert that the OEX.X and some other indexes
will also head lower. Traders that slap a retracement bracket on
the S&P 500 like we did on the S&P 100 (OEX.X) will see very
similar results as should be expected.
A trader that currently holds some bearish positions now knows
how important the 30-year YIELD is to his/her potentially finding
further gains in their bearish positions, while at the same time
understands how a rally in bond YIELD (selling in bonds) could
affect a move higher in the OEX.X and SPX. Currently, I think
there is a good chance that we see the 30-year YIELD dip back
below the 5.35% level, but it truly is a day-by-day observation
that we need to continue to monitor.
S&P 100 Bullish Percent ($BPOEX) - 2% scale
Thursday's action in the S&P 100 had the bullish percent for this
index back in "bear alert" status. The last time this index
achieved the "bear alert" status was back in late February of
this year. I will note that yesterday's "bear alert" reading
came at a LOWER level of bullishness that that found in February,
thus I don't think further index action will have the downward
punch that we saw in March and April. On the bar chart for the
OEX.X, I placed two thick pink horizontal trends that "identify"
pivot points for the OEX.X.
Isn't it interesting how the bullish percent reading for May (red
5 on bullish percent chart) came at the 70% level (overbought),
just as the bar chart of the OEX.X achieved our thick pink pivot
level? Isn't it also interesting how the YIELD on the 30-year
fell below 19.1% retracement about the same time the OEX.X fell
below its 19.1% retracement? I think so. As they have gone down
together, I feel they also have a good chance of going up back up
together and gives the trader/investor two very different types
of securities to monitor against each other. With retracement
brackets overlaid, traders can gauge levels and assess
risk/reward much better.
Jeff Bailey
