Bond Yields Hit Mega Resistance. Will They Go Through?
- 3- and 10-year series challenging their secular down trendlines
- Three indicators that suggest lower bond yields
- The Crunch Chart
3- and 10-year series challenging their secular down trend lines
US government bond yields have reached very important resistance, at a time when they are overextended on a long-term momentum basis. Take the 3-year yield in Chart 1 for instance. It is currently bumping up against its 1981-2018 secular down trend line. It’s an important one, not only due to its 38-year length, but because it has already turned back six rallies. The red vertical lines flag instances when the KST for the yield peaked out.
Since most of the period covered by the chart was one in which the secular trend was declining, it’s not surprising that these yield sell signals were pretty accurate. However, even during the 1969-81 section of the chart, when the secular yield trend was up, the KST still managed to identify four primary trend peaks. Only one sell signal was false. That one developed in 1979. Right now, the KST is rising and is at a record level.
Chart 1
Staying with the chart above, on the one hand that high reading is a sign that the secular downtrend is in the process of reversing. Alternatively, it means that the yield has reached the trend line resistance in an overbought state. That combination says that this is as good a time as any, for expecting some kind of temporary halt in the uptrend. It’s similar in nature for instance, to what we saw in 2015 following the previous KST peak (see the brown horizontal arrow). If the yield immediately moves above the secular down trend line and fails to respond to these pressures by consolidating for a while, I would expect to see a pretty fast move returning the yield to its previous (2007) major high in the 4.5-5.0% area.
Chart 2 below shows a pretty similar picture, this time reflecting the 10-year yield. It too is running into resistance at its secular down trend line. This one is also a formidable level of dynamic resistance. I say “dynamic”, because the line is continually moving and therefore changing the its resistance point.
Chart 2
Three indicators that suggest lower bond yields
Chart 3 features the 30-year bond yield. This series is also trying to reverse its secular bear market, but remains somewhat below the green secular down trend line. The bottom window contains a long-term KST for the copper price. The solid red arrows tell us that when the copper KST peaks this seems to be consistent with a trend of lower rates. That makes sense, because copper is a proxy for industrial commodity prices and the economy. Consequently, a slowdown in copper momentum implies the kind of slowdown in the growth rate of the economy that is consistent with lower bond yields. Notice we are talking ”slowdown” not recession. The recent downside reversal in the copper price KST, therefore argues for lower bond yields, or an extension of the recent trading range.
Chart 3
Incidentally, Chart 4 shows the same exercise, but this time inserting buy signals for an upside reversal. Since more of the arrows are dashed in this instance, buy signals for yields appear to be less accurate than the sells.
Chart 4
Chart 5 compares the 20-year yield with its 78-week (18-month) ROC. It seems that whenever the oscillator crosses decisively through, or reverses at its extreme -25% and -25% we see a worthwhile reversal in bond yields. These instances have been flagged with the green and red arrows. A sell signal was triggered earlier in the year and the ROC also violated its 2017-18 up trend line. So far, the yield itself has not yet confirmed with a break of its own.
Chart 5
Chart 6 compares my Net New Bond High indicator (You can read about it here), to the Barclays 7-10-year Trust. This series monitors a universe of US and international bond ETF’s that register net new highs over a 40-day time span. The green arrows show that when it reverses from an overstretched reading on the downside, some form of rally typically follows. For the most part, it seems to be a two-stage process. Initially the price experiences a trading range, which forms a base for the second phase, which is the rally itself. In the current situation, the oversold reversal took place back in April. This has since been followed by a trading range. If events remain consistent with the experience since 2011, a rally should follow.
Chart 6
The Crunch Chart
Chart 7 breaks the long-term action of Chart 5 into daily chart action, where you can see the juncture points that would qualify for a downside reversal, are between 2.85-2.94%. These are important, because that is where the red dashed support trendline, the 200-day MA and the neckline of a potential head and shoulders pattern are currently residing. Right now, we have to assume that the basic up trend is intact, as witnessed by a rising short-term KST. Once that’s over, we may find some of the negative longer-term indicators kick in. This chart should tell us that, which is why it earns the name “crunch”.
Chart 7
Conclusion
Yields have reached a really important long-term juncture point. If they push higher through their secular down trend lines then a very sharp extension to the primary uptrend would be likely. That view is also supported by Chart 7, since a move to new highs would mean that the head and shoulders did not “work”, and failed patterns such as this are typically followed by an above average move. In this case that direction would be to the upside. On the other hand, if the head and shoulders is upgraded from a “potential” to a ”real” one, with a drop in the 20-year yield to say, 2.80%, then the more benign scenario painted by the copper price and the 78-week ROC would likely transpire.
This month, the Market Roundup carries a lot of information about how acute the current market position is in globally.
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.
