Diary of a Financier

Treasuries to Enter the Bear’s Den After an Equity Pullback

In Capital Markets on Wed 22 Aug 2012 at 09:27

US Treasury paper is on the brink of a powerful bear cycle. The “risk-free” assets–within which lay all the duration risk–have one last opportunity to prolong their perennial rally, since the S&P 500 (SPX) appears overbought in the immediate-term. This presents a historical opportunity for a swing-trader, so I had to do some thorough analysis to establish a short-term gameplan and longer-term strategy. Here’s a bit of a peek.

The SPY is above its 100% Fibonacci retracement. Were it for that alone, I wouldn’t flinch, but stochastics on all major fractals (daily/weekly/monthly) are overbought. In addition, reverting back to the 2011 analogue, I find evidence in support of a pullback from these highs:

SPY daily (2011 analogue)- at 100% Fibonacci retracement, where SPY broke-down in 2011 analogue; volume needs to propel this higher

Given that vote for risk-off, Treasuries are predictably preparing for their own short-term, bull reversal. However, more importantly, T-bonds have begun to form a longer-term top, which should dismantle the 30+ year secular bull run, starting this year. For example, Treasury yields across all maturities exhibit falling wedges with rates at trendline resistance and bull divergence warning of a breakout higher. I noted 10y yields (TNX) last week:

TNX daily- 10y yield shows bull divergence backing a breakout of the falling wedge.

Naturally, a rising wedge in the 10y T-Bond price futures (TY/) reflects this pattern from the yield chart. Further down the yield curve, the point is even more punctuated by the 30y. Before I hit the punchline, it’s important to note that the 30y price (US/) has fallen fast toward trendline support of its own rising wedge, and like the 10y, it’s oversold enough to rally one more time while the S&P 500 takes a rest:

US daily- 30y price shows rising wedge w bear divergence threatening to break <$144 trendline support.

Here, 30y yields (TYX) provide the money-shot. First, TYX shows a falling wedge (of course), which wound tighter into its vertex than all the other maturities. Second, a double-bottom is apparent–best exhibited by the monthly chart:

TYX daily/weekly/monthly- 30y yield shows bull divergence off double bottom support in a falling wedge; monthly fractal shows LT bear trend resistance.

I’ve looked for some such setups in the past, and I can’t find any neat fits wherein a failure of these patterns materialized. Not only are T-bonds (10s & 30s) on the bond bear’s doorstep, but also T-bills of shorter maturities, like the 5y. In fact, 5y yields (FVX) are perhaps the most interesting on the Treasury curve, since they’re already trading above the trendline resistance that’s damming the leak in longer-dated maturities:

FVX daily- breakout above trendline resistance already, with bull divergence at its aid.

These signals from Treasuries arrive alongside technical signaling that the SPX will challenge the upper limits of its secular bear channel–an important development I observed last week. When the time comes, I’ll await confirmation of a breakout higher (above resistance) in longer-maturity T-bonds yields before acting with conviction by doing something like shorting high-duration fixed income ETFs.  Right now, the biggest risk to this thesis is interest rate swaps, which haven’t acted for fear of rising rates.

–Romeo

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  1. […] in equities’ assault on their secular bear market last week, I followed-up with an entry discussing the secular reversal occurring in Treasuries too. By definition, these secular shifts are long-term […]

  2. […] fall will offer the buying opportunity I’ve hoped for–a chance to drop my last muni/Treasury remnants and cycle into High Yield.  I already own four singlename, junk-rated bond issues.  I […]

  3. […] would ignite TNX’s monthly fractal with bullish divergence, corroberating the higher trend already intimated by the weekly […]

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