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Interest Rate Advance Suddenly Stalls

04/21/05 08:17:28 AM
by Arthur Hill

The uptrend in long-term rates remains intact, but a sudden lower high has put it in jeopardy.

Security:   $TNX
Position:   Hold

After a sharp rise in February and March 2005, the 10-year Treasury note yield stalled and pulled back sharply. Note that the prior advances (June-August 2003 and March-May 2004) were very sharp and forged higher highs (red arrows). The current advance started just as strong, but fizzled after seven weeks and formed a lower high (black arrows). The result is a large triangle pattern in the works and the long-term trend for TNX is in jeopardy.

Triangles are neutral patterns that denote a consolidation. In fact, TNX seems to be pretty good at the consolidation game, as it has traded on either side of 4.35% for almost three years (gray line) (Figure 1). Resolution of this triangle will dictate the next long-term move. A break above 4.7% would be bullish and a break below 3.95% would be bearish.

Figure 1: 10-Year Note Yield. Triangles are neutral patterns that denote a consolidation. In fact, TNX seems to be pretty good at the consolidation game, as it has traded on either side of 4.35% for almost three years (gray line).
Graphic provided by: MetaStock.
Graphic provided by: Reuters Data.
 
Homing in on the daily chart, we can see that TNX is a critical point. TNX broke resistance around 4.4% with a big advance in February and March. Broken resistance usually turns into support, but this level failed and the decline extended to around 4.2%. The current decline has retraced 62% of the prior advance. Normal retracements are 38-62%, and this retracement is at its make-or-break point. Further weakness would be deemed excessive and increase the odds of a support break at 3.95%.



Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

Title: Editor
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