Who's Afraid Of The Big Bad 3%?

• Technical position for yields still looks bullish
• International rates look higher
• Dollar breaks out, but will it hold?
• Finely balanced Gold picture needs some guidance from the Dollar

If you have punched up the symbol $TNX, you will know that the 10-year yield has recently hit 3%. Chances are that you would have already known this fact, because it has been transmitted widely over the media. Generally speaking, when an investment idea becomes well-known or popular it’s time to be looking the other way. Whether that will happen in the current situation remains to be seen, so let’s delve into the technical picture a little deeper.

Technical position for yields still looks bullish

The primary trend picture for $TNX, is displayed in Chart 1. It’s pretty apparent that the long-term KST is in a bullish mode and the yield itself is comfortably above its 12-month MA. As long as those conditions hold, count me as a primary trend bull. However, the chart also points up the fact that 3% was the approximate high point in late 2013. Previous highs and lows represent potential support and resistance areas. In this case it was a pretty important high. Given the bullish sentiment on yields, this may be as good a place for expecting a counter-cyclical correction to develop.

Chart 1

On the other hand, Chart 2 shows that using daily data, the yield ($TNX) is supported by positive short- and intermediate term momentum. Assuming a bullish primary trend, positive momentum ought to drive the yield higher. If it is unable to punch through the resistance, a drop towards the 200-day MA and dashed green breakout trend line would be more likely.

Chart 2

The stakes are pretty high, as Chart 3 shows that the Barclays 20-year Trust (TLT) is below its 65-week EMA. The small blue arrows show that this average has been a good pivotal point for turning around recent rallies and reactions. That certainly sets a negative tone, especially as the price is right at the neckline of a potential head and shoulders top. Any additional weakness (rise in yields) will result in a breakdown. Since this pattern has been four-years in the making, that a downside break would be quite serious.

Chart 3

International rates look higher

Chart 4 tells us that the US is not alone in experiencing a trend of rising rates. That’s because the 10-year yields for the UK, Germany (Europe) and Japan all survived a breach of their dashed red support trend lines and are now pulling away from their solid green trend lines.

Chart 4

Chart 5 looks at this from a more comprehensive global perspective, with my World Bond Index. Recently it looked as if this series was in the process of completing a bullish ascending right angled triangle. However, action in the last few days has put that idea to bed, as the Index has violated the red ascending part of the triangle and broken through its 200-day MA. The small arrows remind us that the three previous MA crossovers were quite accurate. Finally, the large red dashed arrow in August of 2017, warns that when a new high is being registered at a time when short-term upside momentum is weak, such an event is often followed by an above average decline. To qualify, this action requires some confirmation from the price. In this case that took the form of a downside trendline violation. We see a similar setup today, with the KST topping out at roughly the same level as it did in 2016. Confirmation with a the violation of the red 2017-18 up trendline has already been given. It’s also important to note, that failed ascending triangles in their own right, are often followed by above average declines.

Chart 5

Dollar breaks out, but will it hold?

Last week I wrote that the Dollar Index is in a primary bear market, but that it was likely to break out from a small base.  Chart 6 shows that it did, as it completed the pattern and jumped over the red breakdown trend line. It has also moved above the green secondary bear trend line. One cautionary note, is that this is a Friday close chart. The latest plot only takes us up to Wednesday.

Chart 6

It’s important to note that bear markets are notorious for triggering false and deceptive breakouts, so it’s possible the current one does not hold. That would be signaled with a penetration of the red up trendline in Chart 7. That kind of action would be symbolic of a bear market, meaning that we should then expect a new down leg to begin at any time. This would set in motion a tail wind for higher commodity prices and gold.

Chart 7

On the other hand, the short-term KST in Chart 7 has just gone bullish, and commitment of traders for the both the Dollar Index and the euro, having reached extreme levels, remain consistent with a Dollar rally. Extreme bearish sentiment on the Dollar has also started to turn, which is usually a positive sign.  In other words, this advance may well be the first in a new primary bull market. The actual outcome is likely to have an important effect on commodities and gold, both of whom move inversely with it.

Finely balanced Gold picture needs some guidance from the dollar

Chart 8 lays out the connection between the Dollar and Gold. Please note that the Gold Trust (GLD) has been plotted inversely, so the two series swing in a similar direction. Note that the Dollar has clearly broken to the upside, whereas the Gold break is so far, an anemic one. If the Dollar breakout is for real, I would expect to see Gold follow suit. On the other hand, if the Dollar bear has not been slayed and its upside breakout turns out to be false, expect Gold to soar. In the case of this inversely plotted chart, it would plummet.

Chart 8

Chart 9 sets the stakes more clearly. That’s because, Gold has been in a wide trading range for several years, and an even tighter one since the start of the year. The flat and indecisive nature of the three KST’s are not offering much help, as to whether the price will break above the green, or below the red line. That’s where I expect the dollar to help, because a valid upside break will mean a drop below the red line, whereas a failed upside breakout will trigger a sharp move above the solid green line.

Chart 9

Good luck and good charting,
Martin J. Pring

The views expressed in this article are those of the author and do not necessarily reflect the position or opinion of Pring Turner Capital Group of Walnut Creek or its affiliates.