Consolidations and Corrections

09/26/00 02:52:01 PM

by David Penn

Breaking out of a six week consolidation pattern, the December 2000 Treasury bond rose three points to a 52-week high just over 101. But a September correction has taken the long bond beneath its short-term moving averages, all but erasing a month's worth of gains.

Security: N/A
Position: N/A

The 30-year Treasury bond has advanced from its May lows in two major movements. The first climb took the bond from under $94 to a consolidation area between $96 and $98. The consolidation lasted approximately from June to late August, when the second advance began. This second advance, longer lasting and less steep than the late May climb, took the long bond as high as $101 02/32, with another consolidation range forming in August between $99 and $101.

But as the August consolidation range extended into September, prices fell dramatically, which may take the 30-year Treasury back into the previous consolidation range between $96 and $98. The declines, however, might well have been anticipated given the relationship between the price trend and its moving averages, as the chart below points out. The December 30-year T-bond fell beneath its 4-, 9- and 18-day moving averages at just about the same time the shorter moving averages began crossing beneath the longer ones--a significantly bearish indication.

Note the 4-day moving average breaking out over the longer averages at point 1, anticipating the upturn in June. At point 2, the 4-day moving average is crossing under the longer averages, a bearish development.

Graphic provided by: Future Source.

As the chart reveals, instances in which the shorter, 4-day moving average moved upside the longer, 18-day moving average, coincide with bullish price movements. For example, both the June and mid-July advances are anticipated by the 4-day moving average breaking out over the 9- and 18-day moving averages. Additionally, the 9-day moving average crosses over the 18-day moving average line at almost the same time. Insofar as shorter moving averages reflect more recent price changes, the fact that a moving average with a shorter duration is crossing up over a moving average with a longer duration is considered bullish.

However, in September, as the 30-year Treasury is moving into new high territory for the year, we note that the opposite is occurring with respect to the moving averages. Instead of the shorter moving averages crossing over the longer moving averages, we find the 4-day moving average dipping beneath the 9- and 18-day moving averages, leading both price and the other moving averages into the September downturn and into what may become a resumption of the June-August, $96-$98 consolidation range.

There is room for a short-term up move in the immediate future, as bond buyers take advantage of the lowest prices in the 30-year Treasury bond since mid-July. And, in fact, there was a small upward reaction developing at the beginning of the last week of September. But given the bond's current placement at the top of its old $96-$98 consolidation range, it is likely to take a great deal of buying and selling pressure to move the bond very significantly in either direction. With little interest rate news on the horizon, and the growth economy continuing to prove its resilience, the 30-year Treasury bond seems quite capable of settling into a "hear no evil" price range in the immediate future.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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