From the Desk of Ian Culley @IanCulley
Failed breakouts and trading ranges dominate the charts.
It’s a mixed-up, messy market environment wherever you look — bonds, stocks, commodities, forex…
US treasuries are a prime example, playing it cool with muted volatility and tight credit spreads while yields climb.
Perhaps the near-term rise in rates makes it difficult to grasp, but the US benchmark yield is actually chopping within a broader corrective phase.
Before we dive into the charts, I want to make two things clear:
One, I am not an Elliottician or an Elliott Wave specialist on any level. And two, if you give five Elliotticians the same chart, you’re likely to get five different wave counts.
Nevertheless, my journey to earning the CMT designation exposed me to the Elliott Theory, and I find it prudent when examining the US 10-year yield.
So here we go…
I can’t ignore the impulse wave on the US benchmark interest rate (highlighted in bright blue):
I will not cover the dizzying rules and notation that define these waves (for more information, check out the Elliott Wave Principle by Frost and Prechter.)
Instead, today’s aim focuses on the rally (impulse wave) completed last year and the potential correction (zig-zag) that may follow.
A full cycle in Elliot’s world consists of a trending and a countertrending wave. It makes sense as price action expands and contracts, never moving in a straight line.
The motive or trending wave came to an end last year with the October peak. Since then, the 10-year yield has pulled back to register a higher low.
Corrections come in three-wave sets of varying forms denoted with the A-B-C nomenclature.
If the late-December low marks the end of wave A (the first of three), another wave lower may be in the cards for the US 10-year:
But as Frost and Prechter clarify in their classic Elliott Wave Principle, “...it can be difficult at times to fit corrective waves into recognizable patterns until they are completed and behind us.” (Spoken like a true technician!)
Nevertheless, by definition, wave C undercuts the end of wave A, which could send the 10-year yield toward a key retracement level at approximately 3.25:
A new year-to-date low for the benchmark yield wouldn’t negate the underlying uptrend for interest rates. Plus, it seems logical considering the intermediate mean-reverting environment.
Most assets are correcting within a sideways mess, including interest rates. Embrace it.
I’m sure stocks won’t mind if bonds zig and zag.
What do you think of the Elliott Theory?
Yea, or nay?
-Ian
Countdown to FOMC
The market is kicking the probability of the first 25-basis-point rate cut further down the road to the September meeting.
Here are the target rate probabilities based on fed funds futures:
Click the table to enlarge the view.
This data is from the CME FedWatch Tool as of April 18, 2024.
Thanks for reading.
And as always, be sure to download this week’s Bond Report!
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