TEN-YEAR TREASURY YIELD GAPS HIGHER -- 20-YEAR TREASURY BOND ISHARES GAP DOWN AND LOOK TOPPY -- THEIR LONGER-RANGE CHART ALSO SUGGESTS A MAJOR BOND TOP IN THE MAKING -- FINANCIAL SPDR AND SMALL CAPS ARE TESTING SUPPORT AT THEIR 50-DAY AVERAGES
TEN-YEAR TREASURY YIELD BOUNCES OFF 200-DAY AVERAGE... My Wednesday message showed the 10-Year Treasury Yield ($TNX) testing its 200-day moving average. Chart 1 shows the TNX gapping 7 basis points higher today after finding support at its 200-day line. I also mentioned on Wednesday that the 10-Year Treasury yield was being held back by even bigger drops in foreign yields. Those foreign yields are also bouncing today, spurred mainly by strong economic news from Europe. Britain is the day's leader with its 10-year yield up 8 bps; French and German 10-year yields are bouncing 3 bps. All of which suggests that today's rebound in sovereign bond yields is global in scope. That means that bond prices are falling around the world.
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Chart 1
20+ YEAR TREASURY BOND ETF IS GAPPING DOWN... When bond yields rise, bond prices fall. And they're doing that today. Chart 2 shows the 20+ Year Treasury Bond iShares (TLT) gapping below its 50-day average today. The three circles in Chart 2 mark the last three peaks in the TLT, and have the look of a potential "head and shoulders" top in the making. [That's when the middle peak (the head) is higher than the two surrounding "shoulders"]. That's a potentially bearish pattern. To complete that top, however, the TLT would have to drop below its late October trough (which would also put it below its 200-day average). The next chart shows why a bond selloff from here would also have longer-range bearish implications.
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Chart 2
A BIGGER BOND TOP IN THE MAKING... The weekly bars in Chart 3 paint an even more negative picture for the 20+ Year Treasury Bond iShares (TLT). The three circles mark an even bigger potential "head and shoulders" top in the making. The first two circles mark previous peaks formed in early 2015 and mid-2016. The third circle shows the third potential peak forming over the past five months (shown in the previous chart). Notice that the third peak is lower than the one formed in 2016, and about the same height as the one formed in 2015. That last circle suggests that a potential "right shoulder" may be part of bigger H&S top. That's why a drop from current levels would have even bigger negative implications. That chart also appears to support my view expressed earlier in the week that bond prices are in the process of forming a major top. [One reason for the bond selling is that commodity prices appear to be bottoming. Higher commodity prices are potentially inflationary and usually bad for bond prices].
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Chart 3
FINANCIAL SPDR IS TESTING ITS 50-DAY AVERAGE... Stocks have experienced some selling over the last couple of days. So far, no real damage is being done to existing uptrends. A couple of groups, however, are testing their 50-day averages. Chart 4 shows the Financial Sector SPDR (XLF) pulling back to its 50-day line. Financials lost some ground over over the past couple of weeks as Treasury yields weakened. But they should get a lift from today's bouncing bond yields. This would be a good time for the that to happen. Any close below its 50-day line would probably cause more selling. Small caps are in a similar situation.
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Chart 4
RUSSELL 2000 SMALL CAP INDEX ALSO TESTS SUPPORT... Chart 5 shows the Russell 2000 Small Cap Index ($RUT) also in the process is testing its 50-day moving average. Small caps have been underperforming large caps of late due mainly to concerns about the tax reform bill before Congress. That's because smaller stocks stand to lose more if the bill runs into problems. Small caps also having a heavy weighting in financial shares. That explains why their chart pattern is similar to the Financial SPDR in the previous chart. What small caps do from here may also impact the market in general. That's because they're usually the first to drop in the early stages of market corrections. There's a lot riding on their ability to stay above their 50-day average.
