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10-Year Treasury Notes Work Toward A Bottom

05/05/05 11:29:53 AM
by David Penn

Positive divergences suggest that the downside in 10-year yields may be increasingly limited.

Security:   $TNX
Position:   N/A

A few weeks back, I highlighted the head and shoulders top in $TNX, the proxy for the yield on the 10-year Treasury note ("The 10-Year Note's Head And Shoulders Top," Advantage, April 19, 2005).

At the time, the $TNX was trading near $42.50 (equivalent to a yield of 4.25%). Given the dimensions of the head and shoulders top, I measured a minimum downside to the $41 level (see Figure 1).

Figure 1: As the $TNX nears its minimum downside objective near $41, a positive stochastic divergence appears--further suggesting that the downside is increasingly limited.
Graphic provided by: Prophet Financial, Inc.
But a funny thing seems to be happening to $TNX en route to its minimum downside objective. Compare the consecutively lower price troughs in mid-April and at the end of April, to the consecutively higher troughs in the 7,10 stochastic, and it is clear that a positive stochastic divergence is developing.

Confirmation of this positive stochastic divergence--confirmation that would suggest a higher value for $TNX and higher interest rates for long-term borrowers--would require a move above $43 or so. The moving average convergence/divergence histogram (MACDH) suggests a potential entry just a little lower in the $42.42 area.

I still suspect that $TNX will reach its downside objective, perhaps accompanied by still further positive divergences (or "running" divergences). But those who see in a falling $TNX a silver lining against the gloom of a slowing economy may find themselves surprised, should that silver lining put in a higher low vis-a-vis the February 2005 lows, and begin to move higher.

David Penn

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

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Date: 05/05/05Rank: 3Comment: 
Date: 05/07/05Rank: 5Comment: David, how do we calculate: The moving average convergence/divergence histogram (MACDH) suggests a potential entry just a little lower in the $42.42 area.

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