TNX 10-Year Treasury Note Yield Weekly and Daily Charts H&S Downward-Sloping Channel

Traders are focusing on the 10-year note yield nowadays since each time QE tapering is mentioned, the yield pops a few basis points. The 10-Year Note Auction is 1 PM EST today. This reflects bond traders trying to exit before the Fed plans to exit so note and bond prices drop and yields pop. Keystone remains in the disinflation and deflation camp, a lonely camp with solitary harmonica music rising above the dim campfire.  Traders may be surprised at how yield remains flat for the foreseeable future and the big up in yield remains on a milk carton going forward. The 10-year yield bottomed in summer 2012, about 18 months ago at 1.40%. Ever since, yields move higher as equity markets move higher in this intermediate term time frame. Even boiling the action down to the nearer term time frames, the yields in general move up with the stock market and yields move down with the stock market. The notable exception was in August as the yield leaped higher towards 3.00% and the stock market was selling off. This causes traders to exclaim that the end to the Fed intervention is near; yields will now ramp higher to 3%, 4% and who knows how much higher, as the unraveling of the near 5 years of stimulus comes home to roost with inflation and perhaps hyperinflation occurring. The charts are not in agreement with this scenario and favor more of a sideways vibe in the most simple terms.

The red lines show the rising wedge, overbot conditions and negative divergence that Keystone highlighted in late August and September to identify the top and spank down, that occurred. As you recall back then, like now, traders were in universal agreement that the sky was the limit for yields--and this is exactly when yields retreated. The weekly chart shows a head and shoulders pattern over the last few months where the 2.50%-ish neck line failure would send the yield lower to 1.90-2.00%. The inverted H&S pattern on the weekly has been highlighted for months now. There are several scenario's. Using the head at 1.40% and neck line at 2.05% targets 2.70% which was achieved. A head at 1.40% and neck line at 2.30% targets 3.20%, which remains on the table. The ADX shows a strong trend in place (in the 20's and higher) as yields fell into 2012 but the bottom was evident as the ADX fell under 20 showing that the strong down trend in yields was over, and it was. The big spike higher this year is met with an ADX that shows the trend higher is for real and remains robust at 30.39, however, much more of a drop in the ADX and it will be apparent that the strong uptrend in yields is over.

The daily chart shows the downward-sloping pink channel in play. Yield jumped above the top rail for now. Yield overtook the October high so the pattern of lower lows and lower highs is now challenged, but as long as yield stays under 3%, the downward pattern of lower lows and lower highs remains overall. The ADX on the daily shows the strong upward trend for yields in place this summer but ran out of gas in October with the ADX now down at 21 showing that a strong uptrend no longer exists. The green lines show the positive divergence bounce in late October and also a long and strong profile for the indicators. Stochastics are way overbot so the expectation is that yields would top out moving forward but still should experience upward prints. The 62% Fib retracement (blue lines) is 2.78%, call it 2.8%. The weekly chart shows a gap big enough to drive a truck through at 2.8-2.9%. Note the overall sideways channel in place for one-half year through 2.50-3.00% with yield now sitting at the mid point at 2.77%.

What does it all mean?  The daily chart wants to see some further buoyancy in yields, the RSI is not yet overbot. The weekly chart is agreeable to some further buoyancy as well with the 2.8-2.9% gap serving as a target although a sideways vibe for the future is likely on tap. Projection is for yield to test the 2.78%-2.91% area where it should top out and then roll over but moving forward the sideways channel through 2.5-3.0% is likely to remain in place a long time. If Keystone's disinflation and deflation scenario comes to be, yields will actually move far lower. The charts would play out the H&S pattern sending yields to 1.90-2.00%. In the disinflation and deflation scenario, stocks would sell off and traders would move into notes and bonds sending yields lower.

One potential outcome over the longer term is that the Fed becomes irrelevant and even though the expectation would be for a big up in yields, and a big initial up may occur on word of QE tapering, but in time, the yields may actually drop as global traders flock into Treasuries due to a nasty global economic downturn. Pay attention to other signals such as copper to note the health, or lack thereof, of Planet Earth's economy, and if the case for universal global deflation becomes more prominent. There are no trades to play for now but as the yield tops out perhaps next week, the TLT long or TBT short trades have potential. 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.