While this is neither a technical column nor one about equities, it’s important to weigh all factors and risk proxies when trying to determine the future direction of bond yields. On that note, I believe the market may be starting to tell us something interesting in a technical sense following Intel’s second-quarter earnings report a couple of weeks back.

Tale Of Two Head-and-Shoulders

Although the head-and-shoulders pattern may be the most overrated formation in the technical playbook, it’s significant for a reason. Not only does it represent a major support line termed the neckline, the head is indicative of exhaustion and buyers’ refusal to chase prices higher. The right shoulder then forms as shorts cover and longs stay put, hoping that the support or neckline will hold and prices will resume their uptrend.

Looking back at 2009, when our banking system was slouching toward nationalization, the Fed started buying bonds; accounting rules were changed; banks raised capital; and “green shoots” were everywhere almost overnight. The S&P 500’s oversold bounce off the lows lasted into the May-July time frame as a head-and-shoulder formation took shape.

Simultaneously, Treasurys were backing off as they were replaced with their riskier counterparts, such as spread debt products and equities, and their yields moved from around 2.62 percent to the psychologically important 4 percent threshold near the highs around that time.

As we moved closer to the Intel report and, more broadly, the second-quarter earnings season in mid-July, skepticism about the recovery had been growing. The market needed a fresh catalyst to sink its teeth into in order to continue its assent. On July 14, 2009, Intel beat its numbers, the head-and-shoulders pattern failed and the market never looked back, rallying another 14 percent.

Fast-forward to 2010 and what are we looking at? A much larger head-and-shoulders pattern for the S&P 500, a return of recovery skepticism and the need for a fresh catalyst. Almost like clockwork, Intel reported another great number midmonth and the head-and -shoulders pattern failed, just like it did last year. So the market should start shooting up like last year, right?

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