Correlation lessons here guys.

I've shown this before, but let's go back to school for a moment, because I believe we are on the cusp of something important.

Go to your favorite charting tool (http://www.stockcharts.com is a good choice) and pull up the TNX chart for 2 years. That's the 10 year treasury yield.

Print it.

Now pull up the SPX chart for the previous two years. Print it.

Get out your ruler, and draw a line through the 48.0 level on the TNX. That's 4.80%.

Draw lines down to each intersection point on a rising trend.

Now overlay that with the SPX. Notice anything? Specifically, look one month later, almost to the day!

Now, look at the width and depth of the spike over 4.80 in each case. Look at the width and the depth of the inverted spike on the SPX. Notice anything again?

It is very rare to get a period of this length with stable interest rates, which makes computing this sort of corrlation a real bitch in a dynamic rate environment. However, in a stable rate environment there's nothing difficult about it at all - you need only your favorite charting tool and a ruler.

We are now in week #3 since the violation of 48.0 this time around.

China appears to have decoupled from our markets, which I do not like one bit. I actually preferred the coupled environment as it made things easier to read.

However, the market is what it is. I've had a few comments (which I rejected) the last couple of days which were insult-laced related to the February top call. Heh, what looks like its going to happen doesn't always. The indicators were there but we got a short plunge and then a recovery; the indicators turned. So you trade it to the side that works at the time.

But now we're sitting here before a move. Is this a guarantee that there is a plunge imminent?

No.

But - the bond yield run shows no sign of letting up. Friday was amazing and today is only slightly less so. We are right up against the channel on the 10 year yield, and every indication is that we're going to plow through it to the upside. RSI is overbought (on rate), MACD remains strong to the upside, stochastics are neutral (trend neutral; holding trend) and on a supply/demand basis the move upward remains solid, with demand for bonds decreasing.

Now looking at the major indices we are not yet to a turn, according to what I am seeing - at least not at a major top. One more day like today, however, and we would likely get a "long exit" signal (if you ignored the previous one!)

On economics Bernacke was talking today and virtually eliminated any chance for rate cuts. ISM non-manufacturing came in above expectations, which also threw cold water on the idea of rate cuts from the Fed.

So where we are? Same place we were, and the indicators are still flashing "caution" signs. Of interest is that we pinged the bottom side of the SPX channel today but bounced off it. This says to me "not quite yet".



Keep on your toes. I had some fun daytrading front-month options on the Qs today, both on the CALL and PUT side. There's some money to be scalped there if you're nimble; the volatility is a near-perfect environment for that sort of thing, but you have to be at the computer to get away with it and not get slaughtered by intraday turns.