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DOUBLE TOPS


A Big Double Top In Long Term Rates

08/07/06 08:12:39 AM
by Arthur Hill

The 30-year Treasury bond yield is testing support from a large double top, and further weakness would increase the chances of a Fed pause.

Security:   $TYX
Position:   Hold

The bond market often leads the Federal Reserve, and traders can derive Fed policy clues from the bond market. Traders can expect Fed policy to remain tight as long as long-term rates are rising. A bearish reversal and decline in long-term rates would signal an upcoming change in Fed policy.

On the daily chart (Figure 1), the 30-year Treasury bond yield (TYX) formed a large double top over the last few months and declined to key support at 5% (50 on the chart). The double top is a bearish reversal pattern that is confirmed with a break below the intermittent low. A break below key support would confirm the double top and project a decline to around 4.7%. The length of the pattern is subtracted from the support break for a target.

FIGURE 1: 30-YEAR BOND YIELD, DAILY. A large double top formed over the last few months and declined to key support at 5%.
Graphic provided by: MetaStock.
 
Even without a support break, it is clear that the 30-year T-bond yield (TYX) has been trading flat since mid-April. The double top is just one big trading range, with support at 5% and resistance at 5.3%. This trading range shows that interest rates stopped rising the last three to four months, and this further increases the chances of a Fed pause. Long-term rates have paused and now the Fed may follow suit.

Based on the moving average convergence/divergence (MACD), I think the odds favor a support break and move lower in the 30-year T-bond yield (TYX). While TYX formed two relatively equal highs in May and late June, the MACD formed a significantly lower high in late June. This shows much less upside momentum (less power) during the June advance, and the MACD then moved into negative territory. Momentum is now negative, and this favors the bears.



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.

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