Exactly a month ago, just after the March bond futures made a long-term high at 117^12, I said there’d be nothing to worry about unless they fell below 109^14. At the time, a drop of that magnitude seemed pretty farfetched, especially considering that the consensus on bonds was almost unanimously bearish at the time.  What a difference a couple of days make! As recently as Monday, the March bond was in the throes of a spirited rally, seemingly reversing the steep slide begun on February 10. But moderate weakness on Tuesday, compounded by yesterday’s wholesale carnage, has seriously undermined the bullish case. At their intraday lows the futures had traversed three-quarters of the distance between last month’s summit and my bearish threshold, which I’ve adjusted down to 109^11.

I’ve reproduced a chart below that shows why this number is so important. A decline surpassing 109^11 would create a very powerful bearish impulse leg by exceeding two prior lows on the weekly chart. The most bearish scenario would require the decline to occur without an upward correction lasting more than a single bar. However, even if the correction stretches to two or three weekly bars, if it comes from below 109^11, it will almost surely be a sucker rally.

All of which implies that market forces may be about to crush Mr. Greenspan’s delicate efforts to reshape the yield curve so as not to frighten the players, and to keep them in the game. Of course, one should never give odds when betting against the Fed, and it’s possible Da Boyz will be able to gin up a buying panic to prevent further slippage. But if and when the March bond slips below December’s bottom, it won’t take a chartist to discern that dire trouble for the U.S. economy is near. Let’s hope the Plunge Protection Team is watching as closely as we are, and that it is not busy in the S&P pit when the yield alarm sounds.

(Click on image to enlarge)