Break of the key 7% level on spanish bonds creates concern

The Spanish 10 year bond yield has tested and broken through the key 7% level today; this is not a good sign for the markets and doesn’t bode well for the Spanish Index. The Ibex has fallen back over the last two days from the highs of 7200 in the face of strong economic headwinds and realisation that the global recessionary stumbling block may be around for a while longer.

In analysing the daily chart (see below) you can see that the sell-off from the highs in March was relentless and steep – a little too steep – when the downtrend line was eventually broken at 6300 at the start of June, a rally of 900 points ensued over a one month period. It would have been tough to anticipate and trade this move with conviction, as bearish anxiety in Spain was extreme but I’ve seen this quite often, where the first trend line break of a fairly steep line can present an excellent set-up to trade a reversal (at least for traders brave enough to try!). It’s currently trading at 6847 which is over 350 points down from the recent highs and has today entered the open gap on the chart, which would close at 6724.

For most sensible technical analysts, the trend is your friend is a favoured adage, and in the case of the Ibex the downtrend is strong and apparent. It’s highly likely that the trend will resume at some point and the fact that the Ibex has encountered major resistance at 7200 and failed to break through means this could be sooner than later. A break below the low of 5987 – seen on 6th June – is far below but would allow a more sensible and less aggressive trend line to be drawn from the March highs to the 7200 resistance high.

To maintain perspective and see both sides, the open gap could offer support here and the potential for a bullish NFP to edge the markets higher is possible, a break of 7200 and close above 7210 would be constructively bullish for the Ibex.