Negative Divergences And The Bond Bounce

06/29/07 02:09:29 PM

by David Penn

Lower peaks in the MACD histogram accompany the advance in the September Treasury note.

Security: TYU7
Position: N/A

The specter of rising long-term interest rates reached an apogee in the first half of June, as the yield on the 10-year Treasury note surged from less than 4.6 to more than 5.25 in a month. That surge is reflected in the hourly chart of the September 10-year Treasury note in Figure 1.

FIGURE 1: US TREASURY NOTE, SEPTEMBER FUTURES, HOURLY. The bounce in bonds that began in the first half of June is increasingly characterized by shorter and shorter peaks in the MACD histogram. This suggests that the move higher is losing momentum to the upside and is ripe for correction.

Graphic provided by: Prophet Financial, Inc.

The moving average convergence/divergence (MACD) histogram has already provided some helpful guidance for traders on the hourly chart. The bottom was anticipated by a positive divergence, and the massive size of the histogram that develops after the positive divergence is a strong signal that prices will continue to move higher.

That initial "massive" histogram peak itself featured a very short-term negative divergence from the beginning of the peak to its later stages. The market was sensitive to this divergence as well, as the September T-note dipped below the 20-period exponential moving average (EMA) before moving higher and resuming the rally.

But the negative divergences in the MACD histogram continue to mount, which makes the rally more susceptible to reversal or, at a minimum, sideways correction. The critical support level is at 104.5. A close below this level would create a lower low, signifying if not a new downtrend, then at least the conclusion of the uptrend for the time being.

David Penn

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

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Negative Divergences And The Bond Bounce

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