S&P 500 Bull Flag Breakout as Long-Term Yields Ease

S&P 500 Talking Points:

• Despite a sell-off at the FOMC meeting last week bulls have shown a strong response in the days after, leading to this week’s bullish breakout from a bull flag formation.
• The question for this week is whether we see strength in tech and AI-stocks, as that lagging quality behind the prior leader brought upon fears of a shift in the equity space.
• The calming in crude oil markets has likely played a role, along with an easing in longer-term yields, both themes explored in this week’s Top 5 Charts for the Week video, linked below.

The beauty of technical analysis is that it tends to condense known facts at a time into a palatable format. To be sure, this doesn’t mean that it’s predictive, as new ‘stuff’ happens all the time and that can, in-turn, effect prices and trends and themes.

But in reality – nothing is predictive – and once a trader learns that they can then move on to looking for methods that can help in search of any possible bias that may be possible.

Bull flag formations, for instance, put into context a bearish short-term backdrop. Like we saw in equities over the past couple of months, ever since Kevin Warsh took over the Fed with a hawkish drive. While the pre-existing thought was that President Trump’s hand picked successor at the Fed would simply input his rate cut directive, Warsh has struck a far different tone and last week he resided over the first rate hike in three years. Not only that – he also warned that another was probably on the way.

From the context of the situation it seems like he has no choice. Oil prices continue to flirt with $100/barrel on the back of the ongoing campaign against Iran and US Treasury yields are at or near 19-year highs and given the build of US debt, that feels rather unsustainable for the long-term.

But – that’s just the headline fodder, and at this point, stocks have remained strong because much like we’ve seen time and time again since the Financial Collapse, policymakers are prioritizing market health and dynamics as a matter of importance. This explains why we’ve been seeing larger and larger buy backs from the US Treasury even as they have an upcoming  maturity wall with a massive amount of principal coming due. This also probably has something to do with calming in long-term yields last week, even as two-year yields jumped dramatically.

This seems to be the expectation that Bessent will do something similar to Yellen the last time the 10-year traded at 5%, and that’s to shift upcoming debt to the shorter-end of the curve.

Given the importance of long-term rates and how 10 and 30-year yields are more correlated with things like mortgages, this could provide some hope for markets that strength can continue to show in the US.

And collectively, between easing oil prices and long-term yields, that’s probably a big reason for the strong risk-on move to start this week, key of which is a clean breakout from the bull flag formation in the S&P 500.

S&P 500 Daily Chart

Chart prepared by James Stanley; data derived from Tradingview

--- written by James Stanley, Senior Market Analyst, Global Macro