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Bulls Beware: Bond and Currency Charts Say It's Not a Pretty Picture Outside of Stocks

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Treasury yields may flip the bullish switch with a rally into today's close. Shy of that, though, bonds and currencies are telling us that all is not yet well underneath the surface.

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You must know by now that I love to see confirmation one way or another across asset classes before I jump in either the bullish or the bearish pools with both feet. Right now, it would be tough to take a plunge on either side. Bullish US and Japanese stocks are symptomatic of how hellbent the central bankers are to prop things up, so it's tough to be a bear. However, the fact that I see so many bearish divergences from both fixed income and currencies tells me to be skeptical of what I'm seeing in US stocks.

Even the action in non-US stocks is disconcerting. The iShares MSCI EAFE Index (NYSEARCA:EFA) and iShares MSCI Emerging Markets Index (NYSEARCA:EEM) funds are obviously struggling to find their footing technically. So outside of the US indices and the Japanese stock market, on what should we be hanging our bullish outlooks? Let's take a look at the largest, most-liquid markets in the world for some truth.

BONDS

The S&P nears resistance – but the 10-Year T-Note Yield is the key resistance we need to watch!

We're still below the historic range of resistance at 1550 - 1,576.09 for the S&P 500 Index (INDEXSP:.INX). The market is through earnings season and now it's past the monthly employment report here in the US. So is the coast all clear or is this to be looked at as if there's few if any new catalysts for the bulls in the next month or so? Are you a glass half full or a glass half empty type of a person?

Seriously, there are too many cross currents to give either the bulls or the bears the edge on this one. I'll spend some time this weekend on the various arguments and try to present them to you in report form early next week. For now, just know that there is no "all clear" being signaled just yet.


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Treasury yields have blown through short-term resistance levels this week. The key resistance level that we must watch into today's close is 2.054% on the yield on the 10-year Treasury Note. A close above that level will be technically significant and will likely force more money out of bonds and into stocks. A failure to hold the breakout (currently, TNX is at 2.052% as of 1:50 p.m. EST) could coincide with a turn back to the downside in stocks.


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CURRENCIES

The euro is faltering.

The euro fell hard this morning on news that Italy's government debt was getting downgraded by one of the ratings agencies. The decline in the euro futures (@EC) basically gave back most of the gains from yesterday...but not all of them yet. Right now, the euro looks bad technically with a potential head-and-shoulders top formation taking shape on the daily chart. However, at this juncture we should be seeing the euro bounce to fill out the right shoulder part of that pattern. Maybe we will; maybe we won't. Adventurous longs can take their shots in the euro at current levels with hopes that the right shoulder will play out and eventually top out at around 1.32500. If you're playing that game, use stops appropriately!

In terms of what this chart means to me for my "risk-on / risk-off" analysis, I would have to label this a bearish divergence for the time being. Let's see if it stays that way.


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The US dollar is strengthening.

The US dollar futures (@DX) are on the verge of a weekly breakout above "correction resistance," thanks in part to the euro and in part to the yen. The greenback's strength has – in the recent past – been part of the "risk off" trade. If that is to remain the case, then this must be labeled another bearish divergence. However, things can and sometimes do change. Perhaps we could see a new "King Dollar" dynamic developing where the equity markets rally here in the US despite a stronger dollar. That possibility being noted, I'm sticking with the recent relationship and calling this a bearish divergence (versus stocks) for the time being.


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Aussie and Canadian dollars looking weak.

The Aussie dollar is set up for more downside although it's taking its time in following through on that set-up. Even in the more bullish of two scenarios I've identified on the chart below, the AD should be setting up for another 2% of downside (which is pretty sizeable in currency terms). Can a falling Aussie be bullish for risk assets? Not in my book.


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The other "stuff" currency, the Canadian dollar (@CD), is sporting one of the more miserable charts in currency land (next to maybe the yen and the British pound). It broke down out of the pennant consolidation pattern a couple of weeks ago and has since broken down below "correction support" in the last week or so. Nothing about this is bullish – not for itself and not for risk assets in general.


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The yen is staying on the rails of the crazy train (to the downside) – with all due respect to Ozzy and friends.

One of the only charts looking worse (for those bullish of the yen) than the chart of the Canadian dollar is that of the Japanese yen (@JY). The yen crossed and looks destined to close the week out below the 161.8% Fibonacci price projection for this third wave move to the downside. A break of that support at 1.0683 should theoretically open up the door for a continued move in the yen down to the 261.8% projection line all the way down at 0.9291. Under normal circumstances, I would read the free-falling yen as a "risk on" message. Should the fact that their own government is pushing things around like this matter? Part of me says, "Yes," but the trader in me says, "Who cares what the reason is?" Let's just give this one to the bulls for now.


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Outside of the falling yen, I'm not seeing anything from the currency markets that would confirm the bullish action in US stocks right now.

All in all, not a pretty picture outside of stock land.

So currency markets are a wet blanket for the bulls. For that matter, not much in the bond markets is exciting me either. Perhaps we will see Treasury yields break out above "correction resistance" and push some money out of bonds and into stocks. But nothing else in bond or currency land is doing anything but acting as a bearish divergence from what we're seeing in our stocks. This is not a recipe for the warm and fuzzies.

I'll put it this way: Were it not for our Fed and the Bank of Japan, where would we be? I'm sure that's why Bennie and his Japanese counterparts are so adamant about not only remaining dovish but also really pushing their agenda forcefully down everyone's throats. The big question is: Can they do this in perpetuity and without negative consequences? "Perhaps – and not likely" would be my initial answers.

That's all for now – have a great weekend!

Twitter: @seachangereport

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