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HEAD & SHOULDERS

Bond Yields Headed Lower

12/02/08 09:36:30 AM
by Arthur Hill

The 10-year Treasury note yield broke long-term support to confirm a bearish continuation pattern that points to sharply lower yields over the next few weeks and months.

Security:   $TNX
Position:   Sell

Figure 1 shows the 10-year Treasury note yield ($TNX) with a large head & shoulders pattern. With the prior move down, this pattern is viewed as a continuation. The long-term trend is visible on Figure 2. A continuation head & shoulders can be viewed as a big consolidation within an existing trend. The support break shows weakness and a continuation of that trend.

FIGURE 1: 10-YEAR TREASURY NOTE YIELD. Note the head & shoulders pattern. Combined with the prior move down, this pattern is viewed as a continuation.
Graphic provided by: MetaStock.
 
Based on traditional technical analysis, the downside projection is to the 23-24 area. This downside projection is based on the height of the pattern, which is around nine points. Neckline support resides around 33.5 (3.35%) and the head & shoulders high is around 42.5 (4.25%). The neckline break looks convincing and bond yields are headed lower.

Figure 2 shows a falling price channel over the last 18 months. Obviously, a falling price channel reflects a downtrend. The green support line is neckline support. The lower channel trendline is around 28 (2.8%) and this area could mark support. The red line shows the head & shoulders target in the 23-24 area (2.3-2.4%).

FIGURE 2: 10-YEAR TREASURY NOTE YIELD. The long-term trend is visible here, as well as a falling price channel over the last 18 months.
Graphic provided by: MetaStock.
 
Bonds move opposite of interest rates. Bonds rise when rates fall and bonds fall when rates rise. A long-term downtrend in rates implies a long-term uptrend in bonds. With a support break in the 10-year T-note yield, we can assume a resistance break in bonds, and bonds are long-term bullish.


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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