Was That A False Breakdown in Treasury Yields?

Readers of this site know by now that my favorite trade setup is the infamous “false move”. It isn’t the text book chart pattern that I look to take advantage of. It’s when those patterns DON’T work out the way they’re “supposed” to that gets me excited. We’ll use our momentum indicators to help identify when there is potential for these events occur.

The latest false move we could be witnessing is in US 10-year yields. It’s really very simple:

1- Key Support at 14.40 was broken on Monday July 23rd

2- While $TNX was making a lower low, momentum (RSI) was putting in a higher low. This bullish divergence tells us not to fully trust this “breakdown”

3- After 4 days below 14.40, Yields gapped higher Friday morning back above that “broken support”

4 – Now we have 4 days of stopped-out longs and new shorts stuck in a bear trap

5- The new rally is fueled by a combination of natural longs, shorts unwinding by buying back, and original longs buying back because they are no longer in the trade after having been stopped-out (the opposite in the case of bonds)

6- The sell-off in yields August 2nd came down and retested what we see as the Real support level and did so successfully confirming our theory

7- This typically is enough momentum to break the security in question out of its previously tight range and on to new highs (this is the one thing that has yet to occur)

8- The upcoming resistance is at 17.00 from a gap lower on May 30th. This level also proved to be plenty of supply throughout the month of June so we know this level is important


Guys this is my favorite setup. It’s why I get up in the morning and look through my chart book. The false breakdowns typically provide enough fuel to get a serious rally going and we could be in the beginning stages of a monster rally in yields. Meanwhile, put up a chart of the inversely correlated Treasury bond prices and look at what a disaster they are right now.

We know that yields have a positive correlation with risk assets in general so if this indeed is a “false move that leads to a fast move in the opposite direction”, I would expect Equities & Commodities to keep rocking.

Stay tuned….


Related Posts:

Are Interest Rates At A Key Inflection Point? (July 31, 2012)