« Intermediate Term Buy Signals on Treasury Bonds »

During our analysis of the bigger picture this weekend, we came across a few interesting signs on the intermediate trends in the 5-year and 10-year treasury notes, as well as in the 30-year treasury bond.

As you know, our focus is on stocks and options, but there is always room for an analysis of the macro picture, at least to get a feel of what is going on on the periphery, so to speak. So we'd like to share a few of our findings on the bond charts with you.

Daily charts of 5-yr, 10-yr notes, and 30-yr bond

Daily charts of 5-year treasury note, 10-year treasury note, and 30-year treasury bond

The chart above is a stacked daily line chart of 5-yr note, 10-yr note and 30-yr bond prices. You'll notice that in each case, price has broken or is close to breaking minor resistance derived from the early-July peak. 

The recent consolidation on the minor trend (Jun-present) has already brought about a breaking of the declining intermediate trendlines on the 5- and the 30-year, and it looks like the 10-yr might be ready to follow suit. The breaking of these minor resistance levels would leave a double bottom on each of the notes/bonds and call for a rise in prices, by an amount equivalent in size to the height of the recent consolidation, over the coming weeks.

While the price action on the daily charts above, calls for a small rally in bond prices (assuming that prices stay above the respective minor resistance levels), the weekly chart of each of the three bonds, provided below, shows potential intermediate trend buy signals that could bring about a substantial rally over a period of several months.

5-yr T-note weekly chart

5-year T-note weekly chart

The weekly chart of the 5-yr T-note shows a buy signal each on RSI and MACD. You'll notice that a positive centerline crossover has taken place on RSI, after a period of nearly three months below the centerline.

Additionally, there is a positive MA crossover on MACD, at a level slightly below the 0-line. Take a look at the rally that followed a similar such instance in July '07, near the left-most portion of the chart. The 5-year note rallied 10 points (a whopping 9.5%) in the eight months following that signal. A similar move followed the positive MA crossover in August '08, as well, by the way. 

10-yr T-note weekly chart

10-year T-note weekly chart

The 10-yr note has broken to a new minor high this week, but it has not broken the declining intermediate trendline as yet. The trendline is being tested at the moment and if the line can be broken, the 10-yr will join the other two bonds featured in this piece, in having done so.

However, there are already two ominous buy signals on the momentum indicators - a positive centerline crossover on RSI and a positive MA crossover on MACD - as is the case with the 5-yr, which we looked at earlier, and the 30-yr, which we'll be looking at next.

Once, again, notice the size of the rally that followed the July '07 buy signal; this note rallied over 14 points (13%) in the eight months that followed that signal. A similar move now would send the note to new historical highs in the mid-130s, late in the first half of next year.

30-yr T-bond weekly chart

30-year T-bond weekly chart

The 30-year bond broke the declining intermediate trendline in early-August and has broken to a new minor closing high over the past week. In addition to showing the aforementioned weak trend-based bullish reversal signals, the index is showing buy signals on the momentum indicators on the weekly chart (seen above).

As with the two notes looked at earlier, the 30-yr bond is showing a positive centerline crossover on weekly RSI and a positive MA crossover on weekly MACD. It's uncertain just how productive these signals will end up being, but it would be a safe bet that unless the signals end up proving false in the near future, a strong rally - perhaps to the levels seen in late-'08 - is on the cards.

Conclusion:

So what does all of this mean with respect to inflation, debt issues, so on and so forth? Well, you know that we focus purely on the technicals here at TheMarketMessenger.com; so we'll leave the commentary on those aspects to someone else. What we can tell you is, it's our usual mantra...

Charts don't lie; more often than not, they prove conventional wisdom wrong.

And at the moment, the charts seem to be saying that bond prices are ready to rise, once again. So until the charts start saying differently, we'll be looking for falling long-term yields over the next couple of quarters.