US 10 year yields are extremely oversold and this may give the S&P an opportunity for a fresh bull run, says Frank Cappelleri, Chief Market Technician at Instinet.

Cappelleri notes how it has been about a year since US 10 year yields broke powerfully above 2.60%, giving a pattern target of 3.90% (see Chart 1). This breakout is now being challenged with rates having dropped dramatically since late 2018; from 3.23% to current levels near 2.60%. He thinks, however, this may be ‘a huge bear trap’ and that the 3.90% pattern target may still be in play if current levels hold.

Given the close correlation between the S&P and 10 year yields (Chart 2), Cappelleri says this may give the S&P an opportunity to recover and achieve its bullish 2,590 target (see Chart 3), though he warns that yields can remain deeply oversold for some time and patience may be required.