Today's big rally in the broader market has positioned the major averages, such as the S&P 500 ($SPX) and Dow Jones Industrial Average ($INDU), to breakout from head and shoulders bottoms. Meanwhile, the recent rise in Treasury yields has positioned bonds to breakdown from a head and shoulders top.

(Treasury yields move inverse to price.)

In early April, I posted a chart of the TLT, which is a long-term bond exchange traded fund (ETF). At the time, the TLT had just formed the right shoulder of its head and shoulders top. Since then, the TLT has dropped down to the neckline of its head and shoulders top.

In early April, I speculated that a rise in Treasury yields (i.e. a drop in the TLT) would be bearish for stocks. My hunch was that a sell-off in Treasuries would reveal that foreign investors were dumping their dollar holdings, including stocks. This idea was wrong as stocks have rallied as Treasuries have sold off.

Re-thinking the analysis, I've come up with a different idea. It all starts with the mess in subprime mortgages and the credit crunch. It's quite likely that investors plowed into the safety and security of Treasuries as the credit crisis was unfolding. This took long-term yields to historically low levels. But as things are improving, it seems that these same investors are exiting the Treasury market in favor of better yields and more risk vis-à-vis the stock market.

So, it's quite possible that a breakdown in the TLT below its neckline could lead to further upside in the stock market. Amazingly, a breakdown in the TLT head and shoulders top might coincide with a breakout in the S&P 500 from its head and shoulders bottom. I've been following the head and shoulders bottom in the S&P 500 very closely. You can read more about the S&P 500's head and shoulders via these links:

S&P 500 Pauses at Neckline of Head and Shoulders Bottom

Revisiting the Head and Shoulders Bottom in the S&P 500

As of today, the S&P 500 is poised to breakout from its head and shoulders bottom. In fact, the TLT and its head and shoulders top might very well serve as confirmation should it break.

In the short-term, a sell-off in Treasuries might continue to help stock prices higher. This inter-market relationship might hold for some time as long-term interest rates are still incredibly low. But eventually, higher long-term rates might hurt the U.S. economy because borrowing costs will rise. But for now, I would make hay while the sun is shining. Who knows how long the relationship between stocks and bonds will last? We might as well exploit it for maximum profit while it does!

The TLT is a Treasury bond exchange traded fund (ETF). The TLT is comprised of long-term Treasuries. When long-term interest rates fall, the TLT rallies. When long-term interest rates rise, the TLT declines.

The TLT has formed an ascending head and shoulders top, where the right shoulder is higher than the left shoulder; additionally, the neckline is sloping upward.

This head and shoulders top in the TLT is actionable. In the short-term, a break below $94 should show follow-through to the neckline near $92. A breakdown below the neckline could ultimately lead to a much bigger drop in the TLT, to the low $80's.

The TLT head and shoulders top is a pattern worth monitoring even if you don't plan on trading it. Treasuries have been extremely strong since stocks slipped into a bear market; long-term interest rates are extremely low. (Treasury prices and yields move inverse to one another.)

The Treasury market has been strong due to risk aversion stemming from the credit crunch and because foreign investors have been willing to buy U.S. debt. But there's been a lot of talk about foreign investors reducing their purchases of Treasuries due to many factors such as the dropping dollar, housing market, recession, etc. If this were to happen, long-term interest rates would move substantially higher, which would be a major hurdle to businesses and especially consumers.

You can observe this dynamic by monitoring the TLT. A break of the neckline might very well confirm what many traders have been talking about: foreign investors reducing their purchases of Treasuries. Such a development would be negative for stocks, hence the importance of the head and shoulders top in the TLT.

Honeywell (HON) is a huge company. It sports a market cap north of $40 billion. It has operations in aerospace, housing, automotive, chemicals, materials, refining and manufacturing.

You can learn more about HON at its Google Finance page.

HON is a great indicator for the economy. If the economy is doing well so, too, is HON. Conversely, if HON tanks, then the economy might do the same. It's because of this indicator status of HON that we're paying close attention to a head and shoulders top in the stock.

It's not a perfectly symmetrical head and shoulders top, but it's pretty close. The head is at $62, the left shoulder at $61.50, and the right shoulder just under $61. The neckline is down around $52 to $53; although, short-term horizontal support at $57 might serve as an action point.

This is an important question to ask because oil is a great leading indicator of economic growth. Quite simply, higher oil prices point to economic growth; lower prices point to slowing growth or contraction.

A breakdown in crude oil might cause the next round of selling in stocks. But I'm not certain that oil is going to breakdown. Crude could simply be consolidating. Nevertheless, let's watch for a breakdown in black gold and look to play it a few different ways.

One way to trade the set-up is through the commodity itself: West Texas Intermediate Crude ($WTIC). The head and shoulders top in crude is far from perfect or symmetrical. It's more of a "hunchback" top. Importantly, horizontal support at $86 is the line in the sand.

You can track and trade the United States Oil Fund (USO) if you're not a futures trader. The USO has formed its own head and shoulders top with horizontal support at $68.

A third play on a breakdown in oil is the UltraShort Oil & Gas ProShares (DUG). DUG moves inversely to the stocks in the oil & gas sector. DUG goes up if the stocks in the group go down.

The difference, of course, between DUG and the others is that DUG is an equity like a stock and not a commodity.

DUG is emerging from an extremely aggressive bullish triangle. Look for DUG to continue higher if $WTIC or the USO breaks below their necklines.

P.S. Later today we'll look at the impact the strengthening dollar is having on crude oil and stocks. You might be surprised by our conclusion, so make sure to check back.

We're going to take a look at three price patterns that are at, or very near, action points. We'll look at two bearish patterns and one bullish continuation pattern. Trading with a bearish bias still makes sense in this market climate.

Intuitive Surgical (ISRG) - Head and Shoulders Top

ISRG has been a huge winner over the last year, trending from $100 to $360. But the stock looks like it's losing some momentum and may even reverse into a bearish trend.

The head and shoulders top formed over the last three months. The neckline, or horizontal support, is at $260. Look for some stabilization in the stock over the next week or two, but be on alert for a breakdown below $260. Such a move should pressure ISRG lower in the short-term.

Ambac Financial (ABK) - Bearish Flag

Ambac Financial insures debt some of which is collatralized debt or CDOs. The play is yet another on the unwinding in the credit markets.

ABK broke down from a bearish flag yesterday. The flag was about two months in the making, following a steep drop from $70. Previous horizontal support at $20 should serve as resistance going forward. In the short-term, the stock could see $15.

XTO Energy (XTO) - Bullish Wedge

You've got to look for relative strength if you're going to trade bullish positions in this market climate. The energy sector is still displaying relative strength.

XTO is a stock to watch in the energy patch. XTO broke out from a bullish wedge two days ago with the move above horizontal resistance at $54. The $54 level is now serving as support. The stock could see $60 in a month or two if oil prices continue higher and the broader market at least stabilizes.