Watch out for bonds—they’re pointing to bad news for stocks: Technician

Friday's market plunge finally broke the S&P 500's flat summer, but there could be one indication that the market slide is set to continue.

While the S&P 500 fell 2 percent during Friday trading, bond prices continued to drop, pushing yields higher. That spells bad news for stocks, according to Evercore ISI technician Rich Ross, who turned to the charts Friday on CNBC's "Trading Nation" to explain why.

Ross charted the TLT, which tracks longer-term Treasury bonds, to show what he sees as a further drop in bond prices. A decline in bond prices means higher yields, which can have an inverse relationship with stocks. While that isn't always the case, Ross sees indications that such an inverse relationship could be at play, using Friday's trends as proof.

"We see those bond prices breaking down and they're testing that 100-day moving average," said Ross. "This breakdown from that formation has corresponded with a backup in yields from 1.33 roughly in the 10-year to 1.66 this morning. That's bad news for stocks, which have climbed on the back of those low interest rates."

How much farther could bond prices fall? To make that prediction, Ross points to the appearance of what he calls a "pennant" pattern, a period of consolidation in the TLT that could signal a break to the downside. The height of the pattern was at $144 and the low point was at $138, which leads Ross to conclude that a break downward would see the TLT tumble another 6 points.

In other words, the TLT could hit $132, and if Friday's trends are any indication that means stock prices could fall even further as well.


Trades to Watch

Trader Bios


Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

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

Read more