Tuesday, December 29, 2009

TNX Inverted Head and Shoulders?

I am personally not a big fan of head and shoulders formations. I think that people tend to see these formations all too often. Where the will and where they want. But in an effort to see all of the possibilities and be prepared, I humbly submit this chart of the the 10-year Treasury yield. It could be carving out the right shoulder of an inverted head an shoulder pattern. On one hand, this makes sense with Treasury issuance rising to the stratosphere with $2T federal budget deficits as far as the eye can see. On the other hand, with a stabilizing, if not rallying US Dollar, does it make sense that yields would rise? Plenty of times before the markets have done the unthinkable. And plenty of times before seemingly rock solid correlations have broken down and left as many traders as possible in the dust. Will this time be different? Who knows. But just in case, I am steering clear of the bond market. 4.50% seems like a real possibility in Q1. After that, it is anyone's guess, but it may hold important clues. My guess is yields up, followed by a sharp correction with an ultimate upside resolution down the road 18-24 months or so. With that, you at least know what is not likely to happen.


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