This will be the unexpected driver of the market’s next move: Technician

A rise in bond yields is about to take the market a significant leg higher, according to one bullish technician.

"The charts argue for higher interest rates, at least in the near term — and they also suggest that it would be good for stocks," Oppenheimer technical analyst Ari Wald said Monday on CNBC's "Power Lunch." "I think you'll see some of those flows into the equity market and you're going to get a breakout to new highs."

According to Wald's work, this month, the 10-year Treasury yield has continuously bounced off a "very important level" of 1.6 percent. That's the same level of support the key rate found the last five years in a row, and most recently, the level off of which the yield "double bottomed."

"I think it argues for higher rates, a continuation of a risk-on trade and a better performance for equity markets," he said.

To further prove his point, Wald points to a rising range in the "valuation spread" between equities and the bond market, which he defines as the difference between the S&P 500's earnings as a percentage of its price, and the aforementioned 10-year yield.

"A rising line either indicates that stocks are going to get more expensive or Treasurys are going to get cheaper," said Wald. "We think a little bit of both."

Not all traders, however, believe the 10-year yield is positioned for a substantial breakout.

"I would argue that the market continues to be positioned for slow grinds, potentially to the upside," Stacey Gilbert of Susquehanna said Monday on "Power Lunch."

Gilbert explains that while the options market is predicting that interest rates and yields will rise, traders are not positioned for significant rallies to the upside for equities.

"If anything, slow grinding with potential downside shocks" is most likely, she said.

The next big news event for stocks and bonds alike will come on Wednesday, when the Federal Reserve releases its next policy statement.


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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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