Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

The Week Ahead: How Much More Pain Can Bond Holders Expect?

|Includes: DIA, IWM, IYT, QQQ, SPDR S&P 500 Trust ETF (SPY)

Investors were bombarded by economic data after the long Labor Day weekend, ending with the widely anticipated monthly jobs report on Friday. It came in weaker than expected, though the overall unemployment rate dropped. The downward revisions of the previous months were the real story, as they suggest that the economy may not be strong enough yet for the Fed to change its policy.

The gyrations after the report were not surprising, as a whole cottage industry has developed around trying to train traders on how to trade the report. To give you an idea of how crazy the markets were, the yield on the 10-Year T-Note had a range of 2.972% to 2.864% in the first five minutes after the report. The S&P futures had a range of 1656.25 to 1663.50 in the same five minute period.

Click to Enlarge

The more important question for most in today's current environment is, how much more pain can bond owners expect? It has been a rough year for bond holders, as the chart above shows the strong rise in the yield on the 10-Year T-Note, which closed Thursday at 2.977%.

At $11.3 trillion dollars, the Treasury market is the world's largest. Flows out of both, taxable bond ETFs, and bond mutual funds, reached $50 million in June. The leading bond benchmark, the Barclays U.S. Aggregate Bond Index (AGG) is showing a negative return for the first time since 1994.

In the May 27 Eyes on Income, I noted that the upside target from the reverse head and shoulders bottom formation on the 30-Year T-Bond yield chart was in the 4% area. The yield as risen from 3.205% to a high of 3.882% last week.

Click to Enlarge

The monthly chart of the 10-Year T-Note Yield shows that the downtrend from the 2007 high, line b, has been broken. The upside target from the bottom formation is in the 3.10-3.12% area. Many big bond holders have been quoted as saying they were going to start buying T-Notes when the yield reaches the 3.00-3.10% area.

This could cause a short-term pullback in yields in line with the short-term technical outlook with initial support now in the 2.82-2.85% area. There is more important support in the 2.72% area.

Any pullback should be followed by another rise in rates. The long term downtrend is now at 3.667% and a move above this level will confirm a major trend change. The next major resistance for yields is in the 5.186% area. I would not be surprised to see the yield on the 10-Year T-Note close the year well above 3.00%.

There were plenty of warning signs for bond holders at the start of the year, as the high yield market became very overextended. At the end of May ("4 Ways to Summer-Proof Your Portfolio") I focused on the completed H&S top in the Vanguard Total Bond Market Index (VBMFX) which is one of the largest bond funds. It has dropped 3.7% since the end of May.

One of the hardest hit funds has been Bill Gross's Pimco Total Return Fund (PTTRX), as its assets have dropped from $292 billion at the end of April, to $251 billion at the end of August. This was due to a combination of withdrawals and declining prices.

Click to Enlarge

There were $7.7 billion of net outflows in August from PTTRX according to Reuters. The monthly chart shows that the long term uptrend, line a, was broken at the end of May (point 1). There was further confirmation of a top at the end of July (point 2), when additional support at line b, was broken. The top formation has major downside targets in the $9.86-$10.00 area.

Global tensions regarding Syria are still running high, while the economic outlook for the Eurozone continues to improve, as the ECB raised its 2013 growth forecasts. This however was followed by cautionary words from the ECB's Mario Draghi, who commented "These shoots (of recovery) are still very, very green."

Other than the disappointing jobs data on Friday the rest of the economic news last week was quite promising for the manufacturing sector. The ISM Purchasing Managers Index rose to 55.7 which was the best reading since 2011.

Click to Enlarge

The chart of the PMI, as well as those of new orders and production, have all broken their downtrends, consistent with an improvement in manufacturing. The strengthening of the Euro zone economies have helped. Factory orders last Thursday were down, but better than expected, and the ISM Non Manufacturing Index shot up to 58.6, which is the best reading since the peak of the last recovery.

The economic calendar is fairly light this week with jobless claims and Import and Export Prices out on Thursday. Friday we get the most reports, including The Producer Price Index, Retail Sales, the University of Michigan Consumer Sentiment and Business Inventories.

What to Watch
So far, the correction in the stock market has been less than I expected, as the Spyder Trust (SPY) from the August high to low was down just 4.6%. Though the technical studies did improve with last week's higher close, they have not yet all turned positive. However, in reviewing quite a few charts I am seeing more that appear to have held support and are looking much better.

This suggests that one should start to concentrate on buying individual issues, even though the overall market may continue to be choppy. It is still vulnerable to further downdrafts as we head into the FOMC meeting next week. It looks like the first scenario I outlined two weeks ago is looking more likely, but so far, the advance is not broadly based.

Click to Enlarge

One of the most positive signs is the action of the number of S&P 500 stocks that are above their 50-day MAs. This chart shows a 5-day moving average of the S&P stocks above their 50-day moving averages. It has dropped below 40 and now turned up, point d. It shows a similar pattern as was evident at the late June lows, point c.

The market reached much more oversold levels at the June and November 2012 lows, points a and b. This technical approach was discussed in a recent trading lesson. Also a positive is the OBV analysis on both, the PowerShares QQQ Trust (QQQ), and the iShares Russell 2000 Index (IWM) have turned positive.

On the negative side, we still have bearish divergences in several of the key advance/decline lines, and also, the sentiment is not negative enough in my view. There are a few analysts who were telling everyone to buy at any price near the recent highs that have now turned negative. This is a good sign.

Individual investors have continued to get more positive about the market as the bullish% rose from 28.9% on August 22 to 35.5% this week. The number of bears has declined from its high of 42.8% two weeks ago.

The financial newsletter writers have gradually become less bullish, as they are at 37.1%, down from 52.1% on July 17. The number of bears is quite low, still at 23.7%.

The NYSE Composite has rallied nicely after testing the minor 50% Fibonacci retracement support at 9246. The close on Friday was just below the previous swing high, with next resistance at 9533, line a. The wide range and higher close after the jobs report is a positive sign.

Click to Enlarge

The McClellan oscillator broke its downtrend from the early July highs on August 22 and then rallied back to the zero line. It held up much better than prices, as it was only at -70 as the NYSE was making its correction low. This is not a typical bottom formation for the oscillator but has now clearly moved above the zero line.

The NYSE Advance/Decline line closed the week above its WMA, but is still below the bearish divergence resistance at line c. A move above this resistance would be a sign that the worst of the selling was indeed over.

S&P 500
The Spyder Trust (SPY) also had a very wide range on Friday, as it dropped as low as $164.48, before rebounding to close higher for the week.

There is minor resistance now at $167.30 and then stronger at $168.29.

The close was back above the 20-day EMA at $165.95. There is trend line support now at $163.17, with the daily starc- band at $161.88. There is more important support now in the $160 area.

The daily OBV rallied sharply late last week, moving well above its WMA, and clearing the short term resistance at line f. A pullback to the rising WMA should be a good time to buy.

The daily S&P 500 A/D line has broken its downtrend, line g, after holding above the longer term support at line h. It is well above its WMA, which is now starting to flatten out.

Dow Industrials
The SPDR Dow Industrials (DIA) is trying to form a bottom in the $147-$147.77 area, as it tested the lower weekly starc- band a few weeks ago.

The monthly pivot is at the $150.59 area, with further resistance at $153-$153.60.

The technical studies (not shown) are still acting weaker on the Dow, as the relative performance analysis indicates it is lagging not leading the S&P 500. Given the overseas exposure of many of the Dow stocks, this could change if the Euro zone continues to improve. The analysis of the most oversold Dow stocks did reveal that several are not far above important support.

Click to Enlarge

The PowerShares QQQ Trust (QQQ) has held in a narrow range over the past six weeks, as it held above the August monthly pivot at $74.44. It is now very close to making a new closing high and has certainly become a market leading sector.

The monthly pivot for September is at $75.90 for September with the projected high at $78.22. This is just above the daily starc+ band at $78.06 with the weekly at $80.41.

The daily OBV has overcome its bearish divergence resistance, as it closed Friday well above the August highs, line b.

The daily Nasdaq-100 A/D line has moved back above its WMA, but is still well below the bearish divergence resistance at line c. A strong move above this level will confirm the price action. The A/D line did hold the support from the June highs.

There is first support at the rising 20-day EMA, which is at $76.11.

Russell 2000
The iShares Russell 2000 Index (IWM) has also been acting quite well, as it has held the support in the $100 area and then closed above the last six day's high on Friday, gaining close to 2.0% for the week.

There is next resistance at $103.68, and a close above the high at $104.68 should confirm that the correction is over.

The daily OBV has moved well above its flat WMA and it acting quite positive. The Russell 2000 A/D line tested its longer term uptrend, line g, several times during the correction, but has now turned higher. It is still well below the bearish divergence resistance at line f, which needs to be overcome to confirm a new uptrend.

NEXT PAGE: Sector Focus, Commodities, and Tom's Outlook

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.