I’m in a tough spot, analysis-wise. The stock market looks pretty good with a rising trend in the majors, trannies taking out resistance, NYSE composite doing the same, banks breaking out and even the FAANGMs (you figure out what to call them) shrugged off Facebook’s dump. Apple to one trillion!

Higher highs, higher lows, and the advance-decline just hit a fresh new high after July’s malaise. What’s not to like, right?

Well, there’s always something and right now it could be bonds. Keep in mind that most of us think the bond market is a whole lot smarter than the stock market when it comes to disagreements. I think it is very possible that bonds rally – and interest rates fall – even as the Fed sticks to its normalization campaign.

Admittedly, I’ve not been paying as close attention to the markets as I did when I was a full-time columnist. Right now, I’m working with a green energy company (it’s not fintech but it is disruptive) but I am still available to be Chief Analyst somewhere or do balloon animals at bar mitzvahs.

Anyway, I tip my hat to trader extraordinaire Larry Williams, who posted recently that he was very bullish on bonds for the next few months. He cited COT, accumulation, open interest, cycles, seasonals and “most anything else.”

In other words, based on the weight of the evidence, expecting a bond market rally was the only conclusion. This, even as the price charts have shown very little in the way of upside potential. Check out the best argument for higher bond prices and lower bond yields in the 30-year yield chart.

This is a weekly chart and that trendline above starts at the yield peak in 1994. That was a bad year for bonds as rates popped higher.

Also look at simple overhead resistance at about 3.24%. We can quibble over a few basis points but the real meaning here is that there is resistance and a trendline just overhead. And we must assume resistance will hold unless it is proven otherwise.

That suggests rates will drop, perhaps one more time, before the whole curve ratchets higher.

And wait a minute…. that will likely invert the curve for real.  Uh oh.

Well, not so uh-oh, as I have written several times that the inversion should not kill the economy until next year, even if it happens right now.

Now, look at the 10-year yield.

This is also a weekly chart but the bear market trendline is omitted. The reason is that we can make a reasonable argument that the yield market already broke out from the long-term decline. But can we really do that? Yes, when there are several possible trendlines that say different things. Therefore, we cannot cherry pick the one that backs up our conclusion. The conclusion should follow the analysis.

Anyway, is that a potential head-and-shoulders top in the 10-year yield? You bet it is. But keep in mind that these patterns are nothing until they complete. This one did not complete. In fact, it is not even close yet.

But look what will happen if it does. That would be rather bearish for rates and bullish for bonds.

So, Williams set the environment for a bond market rally. I’ve laid out the charting points to confirm it. All we have to do is wait to see if it actually happens.