3.4% or Bust

On Tuesday the S&P 500 gained 0.2%, which made it the only one of the three so-called major averages to rally. NYSE common stock breadth was modestly negative, but upside volume was solidly greater than downside turnover. This suggests that Tuesday was a day for the big cap stocks.

This action did nothing to disrupt our expectations or our “count”, so we will continue to use 927 as first resistance; followed by 935-936, then 956. Similarly, we will continue highlighting support in the 879-866 range. A breach of that range will be of tactical importance so if 879-866 is violated, it would not be a stretch to look for further weakness toward at least 812-777.

Tonight, we thought it might be more important to talk about 10-year yields. In recent weeks we have suggested that the yield rally had an impulsive (trending) look to it, implying that the December lows may have been historic. In that regard, we have stated that the yield decline from June’s high could be counted as a fourth wave in Elliott Wave terms. All of this is still our view. Thus, the decline of recent days from 3.936% to 3.640% is not yet “normal;” it is still substandard.

10-Year Yields with Fibonacci Retracements of March-June Rally

Under normal circumstances, we would expect a fourth wave decline from the June 12 high to retrace 38.2%-50% of the entire rally from the March 18 low (at 2.533%). That implies a move into the 3.4%-3.23% range. A decline much lower than that range would suggest that the current decline may threaten to correct the entire rally from last December’s low. Conversely, an inability to seriously test even the upper end of that range would mean that the post-December uptrend is arguably even more important – and powerful – than we have been giving it credit for.