[Chart Of The Week] There's A Huge Move Coming In The 10-year

JC Parets
January 13, 2016

In all markets, there are uptrends and there are downtrends. And then, of course, there are periods where there is no trend at all and it's just a mess. Ultimately these messes find away to clean themselves up and a new beautiful trend is born. This is just the evolution of markets, that by definition trend. It's our job to try and find them early in their growth, or, on the other hand, look to benefit from the downside of an aging and changing trend.

It's the sideways markets with no trend that'll get you. This is what some of us refer to as a chopfest, and is exactly what we've seen in the 10-year note yield over the past couple of

months.

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Here is a chart of the 10-year U.S. Treasury Yield using weekly timeframes. Notice how, not only are we in between these two converging (thick blue) trend lines since last year's lows, we are also between two (thin blue) converging trendlines that go back to the early 2011 highs. This just happens to come at exactly the flat 200-week simple moving average. When you talk about something being perfectly priced, this is it:

1-12-2016 6-25-20 PM tnx w

What I see here is a very tight range. What happens during these extra tight ranges is that volatility starts to build up steam. Eventually, when the narrow range resolves itself in one direction or another, the volatility explodes and we get a high beta move. The direction of this move is always unknown, but we can take a weight-of-the-evidence approach to try and determine what the highest probability might be. Then, upon confirmation, participate in that direction as best we can.

Here is a closer look at this chart, this time using a daily timeframe. we have a very simple, easy to read line chart in between two massive converging trend lines that go back to the late 2013 highs and the lows early last year. More recently, rates have been in an extra tight range since the big rally in November:

1-12-2016 6-35-52 PM tnx d

Look how this pattern since November, defined by parallel thick blue lines, looks like a text book bull flag. When a pattern that traditionally resolves in the direction of the underlying trend, in this case higher, resolves instead to the downside, the market is speaking. If we start to break this uptrend line since early last year, I think we get a collapse in rates.

The weight of the evidence here is suggesting rates are about to get crushed, specifically the 10-year. As long as this benchmark for interest rates is below 2.1, we want to be taking advantage of further downside (buying bonds). Above 2.1 and I think a wait and see approach is best.

I like the long end of the curve in the futures market or $TLT in the equity ETF land. Either way, this is happening soon.

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Tags: $tlt $tnx

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