Diary of a Financier

10-year is capped for now

In Capital Markets on Thu 21 Mar 2013 at 10:39

TNX (1.927%) is playing out a short term, fulcrum top (inverted Head & Shoulders), with bear divergence to boot. I expect a rally off this right shoulder support and back up to the neckline (2.05-06), before a breakdown retests 1.80 support:

 

TNX daily- ST fulcrum top (inverted H&S)

TNX daily- ST fulcrum top (inverted H&S)

The alternative scenario I can envision is a straight descent from here down to ~1.75, which is trendline support of a short term bull channel. Either way, TNX ends up lower in the short term, but only in the former scenario (fulcrum top) do I see an actionable trade.

Were the fulcrum top action to materialize, the chain reaction can confirm the 10y’s long term trajectory. One [last] turn lower has the potential to ignite TNX’s monthly fractal with bullish divergence, corroberating the higher trend already intimated by the weekly timeframe:

TNX daily (monthly inset)- ST fulcrum top w bear divergence still brewing; monthly bull divergence can mature upon a turn lower

TNX daily (monthly inset)- ST fulcrum top w bear divergence still brewing; monthly bull divergence can mature upon a turn lower

~~~~

I’m prepared to open a position in high grade credit or Treasuries after the descent from that ~2.05 neckline has begun. I’d like to start buying with the 10y >2.00%, if possible. I expect such a fulcrum top in rates because of the pattern’s echo in bond price charts.

I’ll most likely settle for the Aggregate Bond Index (AGG),¹ which has experienced short term bull divergence of its own recently. Warning of one potential risk in AGG, a weak, long term Head & Shoulders AGG daily- risk of H&S topconstruction is starting to mature in the daily chart. (At best, a rounded top has developed, if not this worst-case H&S.) If we get that 10y rally >2.00%, a price slip lower in AGG to neckline support (between $109-110) provides a nice entry point. From there, I see at least 2% upside before right shoulder resistance at $111 (classic) or $112 (tilted).

As a discipline, I always practice patience when entering positions per technical cues. For example, I wouldn’t want to buy AGG; rather, I should short it weeks from now, after it’s met right shoulder resistance and broken down, below its H&S neckline. The breakdown is the confirmation–only then is the chart pattern verified. That rule of thumb is admittedly a warning here, as I analyze AGG as a potential long. But, that assumes I analyze AGG in isolation. Within context of the overarching trend in the preeminent 10y–as well as the short term bearishness still expressed in SPX–I’m willing to trade AGG from the entry point envisioned.

–Romeo

¹TLT is another long candidate, but TLT’s H&S top is more robust (than AGG’s) with a steeper downside and more duration risk.

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  1. […] cyclically rising rates are here, occurring in accordance with the technicals, exactly as I had envisioned back in […]

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