Yields are driving the market action. Here's what chart analysts are watching before making a move

Published Fri, Jul 23 20211:22 PM EDTUpdated Mon, Jul 26 202110:18 AM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

Strategists who follow charts say there are signs that Treasury yields may have bottomed, at least in the near term. When stocks fell hard on Monday, it was the sharp drop in Treasury yields that many investors were watching and worrying about. The 10-year yield in particular has been tightly linked to the stock market, and when it kept falling earlier in the week to as low as the 1.12% level, it unnerved stock investors. When the yield reversed and began to move higher Tuesday, the stock market rallied. Technical analysts say they are watching the action in the TLT, the iShares 20+ Treasury Bond ETF for clues about yields. They say the behavior of the ETF may be signaling that yields at the long end of the Treasury curve have bottomed, at least for the short-term. A second ETF, the IEF iShares 7-10 Year Treasury Bond ETF is sending the same signal. Katie Stockton, founder of Fairlead Securities, said there's a chart pattern in the TLT that would suggest a bottom could have formed. It is called an island reversal. "An island reversal is a gap up that happened after an extended move. Then you get the gap in the opposite direction. It leaves a floating island on the price chart," said Stockton. "It could be another indication that Treasury bond prices are topping." Both TLT and IEF peaked Monday when yields fell sharply. Bond yields move opposite price, so when they are falling, prices are rising and the Treasury ETFs also rise. The most widely watched Treasury yield is the 10-year, which is the benchmark and impacts mortgage loans and other lending rates. Typically this year, when the 10-year yield was dropping, tech and growth stocks would rise. When it was rising, it was a headwind for those stocks. But last week, when the yield kept falling, investors grew concerned that the bond market was signaling trouble ahead in the economy. On Monday, yields fell sharply and stocks tumbled too on fears the delta variant of Covid would force economic shutdowns that would hurt growth. At the same time the TLT raced higher, reaching a high of $151.95 Monday during the broad sell-off in stocks. The 10-year yield, now at 1.28%, kept falling late Monday in the overnight session, and hit its low early Tuesday before reversing. "It looks like Monday got extreme enough. The TLT was bouncing for a week. It put in a short-term top, which means the yield may have put in its low, which is what the market was obsessing about,"" said Scott Redler, partner with T3Live.com. "The move lower [in yields] felt like it was more mechanical, rather than giving us the signal that slower growth and recessionary times were ahead." But Ben Jeffery, U.S. rate strategist at BMO, said he's not ready to call a bottom, and he expects the 10-year to slide back to the 1.10% level, possibly as soon as next week. Jeffery said the catalyst for the move lower in yields again could be the aftermath of next week's two-day Fed meeting, which ends Wednesday afternoon. He said the 10-year yield could retest the 1.12% level reached Tuesday morning "We think we'll get through that to 1.10%," he said. "It's probably going to move sideways into next week, and as August plays out we're still bullish."

A trader works on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., June 30, 2021.

Brendan McDermid | Reuters

Strategists who follow charts say there are signs that Treasury yields may have bottomed, at least in the near term.