Bulls, Bears Likely Lock Horns Around 2600 On S&P 500 Next

It is probably not coincidental that US stocks and Treasury yields peaked together early October. The 10-year rate is right near support and has room to rally near-term. This should bode well for equity bulls who last week put their foot down.

The 10-year T-rate hit 3.25 percent on October 5. The S&P 500 large cap index rose to its all-time high of 2940.91 on September 21 but did not begin its waterfall dive until October 3 when it came within 1.06 points of exceeding the September high.

Prior to reaching that early-October high, the 10-year rallied from 2.03 percent in September 2017, and particularly since July 2016 when it fell to record low 1.34 percent. On its way there, in April it broke out of 3.1 percent – an important level going back to June 2003 (Chart 1). The breakout also approximated a break out of a three-decade-old descending channel.

All along, the yield curve continued to flatten, as short rates followed the fed funds higher, but the long end refused to keep up. The yield spread between two- and 10-year notes fell as low as 11 basis points twice in the first half this month. The bond market is not too excited by prospects for the economy.

Between November 8 and the intraday low of 2.73 percent on December 28, the 10-year yield (2.74 percent) dropped 51 basis points. On the monthly, it is about to complete a potentially bearish MACD cross-under and is also at risk of losing a rising trend line from the July 2016 low. The daily, however, is deeply oversold. Support at the current level goes back to January this year. In the event of a rally, nearest resistance lies at 2.81 percent and after that 2.94 percent. The 200-day moving average rests at 2.96 percent.

On the monthly, the S&P 500, too, has decidedly turned lower. In fact, several momentum indicators have reached the median. They can turn up from here or at least temporarily stop going down. Importantly, last week’s intraday low of 2346.58 tagged the 200-week moving average – successfully thus far. Through that low, the index lost 20.2 percent. And from that low, it has already rallied 5.9 percent. There is room for more.

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Disclaimer: This article is not intended to be, nor shall it be construed as, investment advice. Neither the information nor any opinion expressed here constitutes an offer to buy or sell any ...

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