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CHANNEL LINES


Long-Term Rates Run Into Resistance

08/23/07 01:03:15 PM
by Arthur Hill

Long-term rates have been rising for four and a half years, but that may be about to change as major resistance comes into play and a large double top takes shape.

Security:   $TNX
Position:   Hold

The long-term chart shows the 10-year Treasury note yield ($TNX) over the last 30 years (Figure 1). Before getting into the analysis, remember that bonds move opposite of interest rates, and the reverse of this analysis can be applied to bonds. The big trend is clearly down for rates with a large falling price channel that extends back to 1981. The advance over the last few years carried rates from the lower trendline to the upper one. In fact, TNX pierced the upper trendline twice over the last 12 months but failed to hold above and complete a breakout. This upper channel line represents resistance and a big downtrend.

FIGURE 1: 10-YEAR TREASURY NOTE YIELD, LONG-TERM. The big trend is clearly down for rates with a large falling price channel that extends back to 1981.
Graphic provided by: MetaStock.
 
In addition to the upper channel trendline, we also have resistance from broken support around 5.25% (52.5 on the chart). TNX hit support here in September 2003 and December 1995. After the breakdown, the 10-year T-note yield hit resistance in this area three times (March 2002, July 2006, and June 2007). Taken together, there is stiff resistance around 5.25-5.50% (52.5-55) and a break above 5.50% is needed to reassert the uptrend.

Turning to a shorter time frame (eight years), we can see a rising wedge evolving over the last four and a half years (Figure 2). The advance retraced 62% of the prior decline and met resistance below 5.5% twice. The decline over the last few weeks carried the 10-year T-note yield to trendline support, and a big test is at hand. A trendline break and move below the December 2006 low (red arrow) would reverse this uptrend and call for a continuation lower.

FIGURE 2: 10-YEAR TREASURY NOTE YIELD, 1999–2007. Here's a rising wedge evolving over the last four and a half years.
Graphic provided by: MetaStock.
 
In addition to the rising wedge, there is also a double top brewing over the last 18 months. Yes, these are big patterns that relate to the big picture. Double-top support is at 4.4% (44) and a break below this level would confirm the pattern. The downside projection would be to around 3.5%. The length of the pattern is subtracted from the break for a target.



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.

Title: Editor
Company: TDTrader.com
Address: Willem Geetsstraat 17
Mechelen, B2800
Phone # for sales: 3215345465
Website: www.tdtrader.com
E-mail address: arthurh@tdtrader.com

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