When we last focused on bonds back in October [see: Plan B] we noted that 2s10s spreads were collapsing and 10Y prices (ZN) had reached important support.

Now that yields have broken out and prices and spreads have broken down, we’re already beginning to see the effects on the market and the broader economy.  Bottom line, they aren’t good.

This followed a supposed “breakout” in yields that we never bought.  Even as nearly everyone around us called for 3.5 – 4% yields, we saw them falling from 3.24% back to our 2.85% target — which is exactly what happened.

Since then, ZN has rallied sharply, reaching our 121 target last week and threatening higher.  And, 10Y yields have broken below a trend line dating back to July 2016.We’ll take a look at the road ahead.

continued for members…

As we noted last week, the top of the purple falling wedge is also the midline of a falling (gray) channel — providing a potential breakout in price with solid, potential targets.

Looking at the bigger picture, we can see that ZN is also backtesting a flat, gray flag pattern dating back to 2012.  When it broke down earlier this year, it opened the door to a tag of the large, white channel bottom.

Meanwhile, the breakdown in yields provides solid potential lower targets, with the falling yellow channel .786 at 2.492 looking like the first important test.If it fails, as expected, there are many lower targets that come into play.The price chart provides some targets that fit: 123 for the 2.498 target, 127 for the 2.172 target. The chart below shows potential timing via a recently added falling white channel.Obviously, the above requires yields to continue breaking down and price to break out — a scenario I’ve favored for a long time.  I have never bought into the idea of yields breaking out, simply because I don’t believe the Fed would allow it.  It would be much too onerous from a budget standpoint.

What about the impact on stocks? 

The last time we had a major TL like this break down, equities broke down too.  That one lasted only six months, not 15 months as has the latest.

Rising yields were supportive of stocks as they supported a strong dollar.  But, as we’ve discussed many times, there’s a practical limit to the added value, particularly as the cost of servicing $22 trillion (and growing by $1 trillion per year) debt is taken into account.

I suspect the Fed will blink in January and retreat from the rate hike narrative as December CPI falls below 2%.  Yields are already reflecting this.  As the 2Y plunges, stocks will too.  When the 2s10s reaches zero, or the falling purple TL, that should be the end of spreads narrowing and potentially the end of stocks dropping.

Stay tuned.

The rest of the charts for today…

SPX’s yellow channel has officially broken down.

  ES reached its H&S target and bounced. It’s currently bouncing ahead of the red 1.618 and a little ahead of the purple channel line. VIX will be key, again.  If it can hold the .618, the .786 up at 41.71, followed by the .886 at 45.73.

UPDATE:  1:50 PM

We know that hammering VIX and ramping USDJPY, CL and RB are reliable ways to prop up stocks.  When you do all of the above, you get a 65-pt stop-running rally.

The most significant, of course, is oil.  As we noted on Monday, CL’s rising white channel had broken down.  Now, it’s not.  RB is still broken, but bounced after reaching our Fib target at 1.2603.

USDJPY fell below the .886 we discussed, but is suddenly back in the pink.

All of this leaves SPX heading for the support it fell through the other day: the white and purple 1.272s and, with any luck, a backtest of the yellow channel at 2448.51. PPT indeed…