Here are the specific caution signals that show the market is on the verge of moving from yellow flags to red flags.

I recently put out a piece to subscribers of my market reports that I felt a move in the S&P up to around 1440 would occur and then we’d see a pullback in risk assets. The evidence coming from the fixed income and currency markets currently may be indicating that the correction is coming sooner than I anticipated.

The yield on the 10-year US Treasury Note bounced off of support and is hinting at going higher.

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• Despite this morning’s pullback in rates, the yield on the 10-year US Treasury Note is still in a position where a rally higher may occur.

• The bright red lines on the chart above show the 100% Fibonacci price projection line for what could be an abc correction lower in rates. The 100% line comes in at 2.145% — just slightly below current levels.

• The dark red lines show the 50% retracement line for what I think was wave iii. That level comes in at 2.147% — which obviously closely corresponds with the abc support.

• So, for now, I think the play here is to bet on rates going higher and use any close in the 10-year yield below 2.145% as a backstop. The ProShares Ultra Short 20+Year Treasury (TBT ) is one of the exchange-traded funds that can be used for such a position.

The high-yield bond ETF (JNK ) has come down to (dual) support.

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• The SPDR Barclays High Yield Bond ETF (JNK) has come down with the rest of risk assets over the last week or so. The difference with JNK is that it began to correct back in late February.

• The chart above shows how JNK has worked its way down to fairly significant support. I say fairly significant because there are two support levels that converge very close to current levels.

• The first level at 38.95 is created by the 100% Fibonacci price projection line for JNK’s own abc correction.

• The validation for that approximate level of support comes from the uptrend line that has been in place since October of 2011. That line actually comes in slightly above the 38.95 level, so I defer to the Fibonacci line as being the line in the sand for JNK.

Emerging markets bonds are also trading right at line in the sand support.

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• The iShares JPMorgan US Dollar Emerging Markets Bond ETF (EMB ) is shown in the chart above. You’ll quickly notice that this chart looks very similar to that of the JNK fund.

• EMB has the same dual support at the 112.18 level — created by EMB’s abc Fibonacci support and the uptrend line which has been in place since October.

• EMB is trading right at 112.18 this morning, so this will be an important tell to monitor towards the close today. Any close below 112 will send those technically-inclined to run for the exits.

The US Dollar Index is not helping the risk bulls out at all.

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• The US Dollar Index ($DXY) has been rallying all week (therefore all month) as money has sought out safe harbor and fled risk assets.

• If the DXY closes above 79.96, that will force some technical reactions (further out of risk and into safety). There are two other key resistance levels that the bears will want to see taken out – 80.74 and 81.78.

• Each time one of these mile markers is passed on the way up, it may cause or be coincident with an even more pronounced move out of risk and into safety.

• The bottom line is that it seems that the bulls really do need rates to stay low and the US dollar to remain under pressure for asset inflation (I mean the upward trek in stocks) to continue.

The euro appears set to move lower after making a bid to the upside.

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• The CurrencyShares Euro Trust (FXE ) made a bid recently to take out one of the first major downtrend lines that lay above it. As of now, we have to call that bid a failure.

• After such a failure, my next move is to identify where downside support may come into play. Right now, it looks like the most optimistic outlook is that the FXE is going through an abc correction to the downside and that the 100% Fibonacci projection line at 128.23 will act as good support.

• The more bearish outlook is that the FXE’s peak in late February was it for the upside action and that the next major wave lower is under way. If that’s the case, then the next support for FXE will be either the 138.2% or 161.8% Fibonacci lines at 126.36 or 125.21 (not good as FXE is trading at 130.02 currently).

What is it about the April to June time frame that brings negative issues to a head over in Europe? Whatever the answer, if the developing patterns in the currency markets go full course / come to fruition, it would spell trouble for risk assets across the board. Let’s hope that’s not the case — not just for our investments’ sake.

Twitter: @tttechnalytics

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