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The Triangle In Ten-Year Yields

03/08/04 12:06:01 PM
by David Penn

As the homebuilders' index breaks out on the upside, are yields on ten-year notes headed lower?

Security:   $TNX
Position:   N/A

As the chart suggests, I wrote this article on March 1st. In the time since, the $TNX has broken down from the triangle I mention. Nevertheless, because the purpose of Advantage is to educate rather than provide stock "tips," I thought it would be worthwhile to post this article anyway, even if many readers would have preferred to have come across it days ago--before the massive breakdown in ten-year Treasury yields.


I don't know whether it was seeing the homebuilder's index ($HGX) breakout strongly to the upside, or a recent reading of an article about mortgage innovations -- like "pay option ARMs" that increase the "affordability" of new homes through a process of negative amortization that, as the author of the article suggests, "means" that you owe more on the mortgage every month rather than less -- even if monthly payments are initially lower, but I found myself revisiting a Advantage article I wrote about a month ago on the possibility of significantly higher, long-term ten-year interest rates ("Treasury Yields and MACD Histogram Peaks," January 6, 2004).

At the time, considering a weekly chart of the $TNX, I believed that the spike upward in the MACD histogram, a spike that was higher than any MACD histogram level in many, many months, meant that $TNX was headed higher. Seeing this on a weekly list does not preclude the possibility of short-term weakness that might result in lower ten-year yields in the immediate term. At the time, I was looking to see whether or not the $TNX would make a move on the August highs just north of 4.5%. What happened instead was that $TNX went on an extended sideways consolidation that, to date, has lasted from August 2003 to the present day.

A breakdown from this triangle could send the $TNX back to levels not seen since July 2003.
Graphic provided by: eSignal.
It is this consolidation from which $TNX may be nearing escape. With few technical clues -- particularly as market volatility since the beginning of the year appears to have tapered off somewhat -- I am drawn both to the test of support at the 3.915 level as well as the descending triangle that appears to be forming in the $TNX price action since the beginning of the year. This triangle, if it proves to be a valid chart pattern, could represent the beginning of a drop to the 3.58 area. This area, by the way, would provide some support for a falling $TNX based on the trough formed by the correction in the first half of July 2003 (correction low: 3.617).

It is worth pointing out that $TNX has been a tricky trade in many ways. The methodology I've been following (a combination of Elder's use of the MACD histogram and Bradford Raschke's ANTI oscillator set-up) would not have provided for many good trades in the largely sideways $TNX since the year began (better opportunities existed earlier in the consolidation, i.e., September, October and November.) As a number of traders have pointed out, when you start seeing more winning long set-ups and your short-set-ups begin to fail you, then there is a chance that the market in general is moving higher (and vice versa). That said, the fact that neither the short nor the long signals that I look for have been particularly promising in the $TNX in recent months suggests that $TNX may be deep into its trendless consolidation pattern and that more directional movement could follow.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine,, and Advantage.

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Date: 03/09/04Rank: 4Comment: 
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