All eyes will be on the bond market this coming trading week. There are numerous charts that are showing a significant ‘event’ is in the works. Whether it be corporate bonds or US Treasuries, all have some form of a major resistance or support level that is going to be challenged this coming week.

(click on charts for large view)

Let’s start with one of the mostly followed charts, the 10 year treasury note yield ($TNX). Remember that yield is inverted to price. So when money pours into treasuries (for safety) the price goes up and the yield goes down.

In this chart ($TNX) we are looking at yields. A technical analysis of this chart reveals a rising channel from the beginning of the year. The dotted line is a trend line beginning in mid March. From these two simple analysis tools we see that the 10 year yield last Friday fell below the trend line. Also observe the RSI, which has fallen well below its trend from the start of the year. What can we take away from this? It would appear to us ‘chart readers’ that the probabilities of the yield falling further over the coming weeks is high. The drop should be at least to the lower channel line which would act as support.

If the 10 year yield does begin to drop then we would also see bond prices rise. That brings us to the next chart which is the TLT (iShares 20+), this fund generally tracks the long end of the price curve. On this chart observe that the price is currently right at a down trend resistance line. The two dotted lines represent long term resistance levels. The TLT chart presents us with a very interesting situation right here and now. Should the $TNX (10 year yield) drop this coming week that would correlate to rising bond prices and the TLT will break above the trend line. But a break above the trend line would quickly run into longer term resistance levels (dotted lines).

If the down sloping trend line on the TLT holds, then we can expect to see falling prices and rising yields. Actually either outcome is a bad signal for the broader equity markets because a drastic drop in yields may signal a rapid movement of funds back into the perceived ’safety trade’, and out of the equity market. Should yields continue to rise, then the economy is faced with a very difficult situation where the rising yields is a hindrance to the housing market and all other types of ‘credit’. A situation that stifles growth.

On the other side of TLT is TBT, this is the ultra short of the Barclays Capital 20+ Year U.S. Treasury Index (TLT works just as well here for comparison). TBT rises when TLT drops, and vice verse.

Just as on the TLT chart, we can see that TBT is also at a critical spot. At this time TBT is resting on the up-sloping trend line beginning in December of 2008. Moreover, it is also sitting at a significant Fibonacci retracement level. Now here is the situation, If the 10 year yield (remember the 10 year yield is the most widely watched) falls this will mean that bond prices are rising. This will send the TLT upwards and the TBT will drop below its trend line shown here. Should that happen we may expect to see a drastic reaction in the equities market with a violent down ward move.

And what happens if the 10 year yield rises further? Then the TLT will fall and TBT will rise. The reaction in the equities market may be an initial upward rise, however one must remember that the financial market are starving for credit and rising yields would dampen efforts to unfreeze credit markets and Ben Bernanke will be forced to pull liquidity, essentially draining the equity markets of much needed liquidity and sending stock prices back down.

Given where the volatility index ($VIX) is currently sitting it says that this coming week will indeed be very active.

What about corporate debt? The next two charts reveal similar ‘on the cusp’ of a significant event. The first is that of the JP Morgan Emerging Markets Debt fund (EMB). Observe on the EMB chart that it is currently very near a significant resistance level.

And the final chart is that of the iShares Investment Grade Corporate Bond fund. This too is currently at a very significant resistance level. Should these resistance levels hold, then it will signal that credit conditions are deteriorating once again.

I anticipate a fairly significant trading week ahead. My forecast for the equity markets remains bearish.

The following chart is of the 10 year Treasury Note Yield..

Ben ‘wants’ to keep the yields low if he wants to keep mortgage rates low. A continued rise in the 10 year yield would make it much harder to keep interest rates low for homeowners.

If the 10 year yield breaks above 3.25% it would probably be the time when the FEDS will step in and buy their own notes to control prices/yields, as they have threatened to do for the past six months.

This should be what keeps Bernanke ‘up at night’.

10 Year T Note Yield TNX

Little change this morning in the futures. OF interest however is the 10 year yield ($TNX) is currently up 2.6%. We should see drop in prices of the TLT (and a gain in the TBT) this morning.

Other than that I am hard pressed to find anything of great interest this morning to report. We will have to see what the market has in store for us today without any significant news (good or bad) this morning.

But there is still some more news coming in 30 minutes :

10:00am Nov New Home Sales (last 433K, m/m -5.3%), Nov Existing Home Sales (last 4.98M, m/m last -3.1%), Oct House Price Index m/m (last -1.3%)

The S&P 500 E-Mini Futures Chart I posted last night remains the one to watch for now.