Wednesday, June 18, 2014

UST2Y Daily Chart Long-Term C&H Pattern Testing Breakout

The 2-year yield is at the highest levels since last September and also from July 2011. The 0.50% is a very important psychological and yield support/resistance level. The thick green lines show a Cup & Handle Pattern in play. A base at 0.2% and breakout at 0.5% targets 0.8%. The base at 0.15% targets 0.85%. This is the exact area of overhead resistance from early 2011. If the 2-year yield remains above 0.50% the 0.85%-ish area is in play.

The Fed is expected to continue the $10 billion per month QE taper today. With the increasing talk of a rate hike and growing concerns over inflation, the 2-year yield creeps higher. The 10-year yield ran higher to 2.55%-2.56% to test the top side of a six-week range. Traders got all bulled up on banks due to rising yields but with a 2-year yield rising faster than the 10-year yield the yield curve is actually flattening more than steepening.

The CPI came in hot yesterday showing that prices may be rising faster than expected so traders think that the Fed may act to raise rates sooner than expected and the 2-year yield bumps higher. The current expectation for the first rate hike is June-July 2015. The Fed is in a tight spot since inflation numbers creep up slightly (due to higher food and energy inflation) but this is not indicative of a healthy economy. Wages remain low and falling for years and robots and computers are huge deflationary machines stealing jobs from a troublesome structurally-challenged job market. How can Fed Chair Yellen dance between providing homage to the possibility that inflation is on the rise while at the same time speak her typical accomodation dove talk?

Keep an eye on the 2-year after Yellen unrolls an ancient scroll and tells the markets how to trade this afternoon. The pivot from 0.50% is very important. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.

Note Added 4:04 AM on 6/19/14: The 2-year yield pulls back to 0.44% after Fed Chair Yellen pledges to provide free money forever. She is not concerned about inflation and is remaining extremely accomodative so the yield drops. The C&H pattern can now be placed on hold since price can not yet break out firmly above the 0.50% baseline.

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