TNX 10-Year Treasury Note Yield Daily Chart Overbot Rising Wedge Negative Divergence Bull Flags Inverted Head and Shoulders (H&S) Potential Island Reversal

Lots going on with the 10-year lately. Everyone is watching for a mass exodus from notes and bonds to stocks, to verify that happy equity days are here again. Treasuries are holding their own, maintaining the 2%-ish sideways level the last couple weeks. There is not a strong move out of the safer havens but rather new money appears to be showing a preference to move into riskier equities. So a rotation is not necessarily occurring as yet. Those believing in the inflationary outcome right away expect yields to explode higher. All this said, the 10-year yield was at 2.06% as the screens came up this morning. At his writing, the 10-year has dropped back down to 2.03%.

The red lines show the negative divergence spank down we talked about a couple weeks ago. Yield dropped as February began but reversed over the last few days to favor the 2%-plus area. Note the red rising wedge and strong negative divergence so yield will receive another spank down.  Down yields means the bond price moves up, due to increased demand, and equities markets will move down since money will prefer the safer haven. The pink inverted H&S with head at 1.40% and neck line at 1.85% targets 2.30% the resistance level above.  Keystone's 80/20 rule, where 8's lead to 2's, places 2.20% on the table since a close above 1.80% occurred.  The gap down in April 2012 created an island that yield has remained stranded on for the last ten months. Interestingly, the 2.06% is teasing the gap but it has retreated for now. If yield jumps from 2.05% to 2.15% that would be an island reversal pattern. The other outcome on the upside is that yield simply ventures into the gap for a fill.

The green two-leg bull flag shows leg one from 1.55% to 1.85%, 0.30% difference. After the late December consolidation move, creating the flag, leg two started at 1.70% which would target 2.00%. Yield hit about 1.95% on the second leg, close enough for government work.  Many times you will see a bull flag pattern morph into a larger bull flag pattern, hence the purple bull flag. Leg one is from 1.55% to 1.95%, 0.40% difference. After the early January consolidation, leg two begins from 1.80%, so the target is 2.20%. Thus, there are a few technical parameters that point to a test of the 2.15%-2.30% resistance area. The BB's show yield at the top band and every couple months touches of both the lower and upper BB's have been occurring. In the last two months, however, all the action is dedicated to the top side so a move back to the lower BB should be on tap.

The red lines clearly show a spank down is desired. The weekly TNX chart is peaking but it has a bit more juice available. Therefore, a pull back may occur like the recent pull backs, then another move up to test the gap resistance and breakout level at 2.06-2.07% (also the upper BB). Keystone believes in the disinflationary and deflationary outcome still yet, although no one is remaining in his camp except perhaps Gary Shilling. Traders would be surprised if the 10-year moves through 1.40-2.30% for the next two or three years, perhaps longer. Everyone expects wild inflation right now and for the 10-year yield to be over 3% at the end of this year. It will be interesting to watch play out this year, one thing for certain, the markets will tip their hand in 2013 so an answer will appear by the time Santa appears.

In a nutshell, in the VST, projection is yield moving back down under 2% to the low 1.9%'s and perhaps break down into the 1.8%'s, and then recover again. Equities would move down with yields moving down. TBT moves with the $TNX so the same analysis applies to TBT, it will pull back.  TLT is the inverse, so, to no surprise, TLT is setting up with positive divergence and a long candidate, for those that are risk takers looking for a bottom call. 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.