The market's most important pattern could see a major break next week

For most markets, it's been a bit of an uneventful end to the week: the Dow Jones Industrial Average is trading marginally lower, on track to break its 10-day streak of consecutive rallies, while the dollar is seeing middle-of-the-road performance.

The one market that is on the move today is arguably the most important market of all: the US Treasury market. There's an old trading axiom that the bond market attracts the "smartest" traders, so it's always worth monitoring closely. Based on what we're seeing in the benchmark 10-year bond yield, bond traders are showing signs of shifting into a more defensive posture:

Source: Stockcharts.com

As the chart above shows, the 10-year yield (which moves inversely to the bond's price) has fallen relatively sharply today. Indeed, rates are currently testing the bottom of the big 3-month "symmetrical triangle" pattern. For the uninitiated, these types of patterns are often compared to a coiled spring: as the range continues to contract, energy builds up within the spring. When one of the pressure points is eventually removed, the spring will explode in that direction. Of course, the ultimate direction of these breakouts is notoriously hard to predict, even with yields pressing against the bottom of the triangle pattern.

That said, there's an obvious upcoming fundamental catalyst for a potential breakout early next week: President Donald Trump's address to the joint session on Congress. Traders are optimistic that the new President will flesh out more details to his economic plan, including an update on "phenomenal" proposed tax reform and the status of the promised "massive" infrastructure bill.

Rather than trying to predict the words of a self-proclaimed chaotic world leader, we prefer to follow price. If Tuesday's speech leads to a bearish breakdown from the symmetrical triangle in 10-year yields, odds would favor a continued decline. This could benefit stocks in higher-yielding sectors like Utilities, REITs, Healthcare, and Consumer Staples, as well as hurt the US dollar. On the other hand, a Trump-driven bounce from the bottom of the 10-year yield's symmetrical triangle pattern would signal risk is back "on," likely benefiting cyclical stocks in the Technology, Material, and Energy sectors, as well as providing a tailwind for the US dollar.

Regardless of what happens on Tuesday, investors should constantly keep intermarket relationships and trends in mind!

Thanks,
 
Matt