Big Four Macro: Bonds Part 2

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In last week’s macro outlook post we covered the outlook for intermediate and long bond yields. The analysis concluded that the long term technical trend has changed from lower to flat/neutral but that more work (i.e., a higher low) is needed to definitively turn the macro trend higher. That piece is linked below in the related idea section.

10 Year Yield Weekly: After peaking at 4.34% in October, 10s have declined into the first confluence of support. The confluence is defined by 2 channel bottoms, the fibonocci retracement of the last wave higher, an internal trend line (not shown and slightly violated) across the 3.04% – 3.25% highs and the last violated pivot @ 3.25%. Additionally, the move from 4.34% has covered about 100 basis points, consistent with the last two primary corrections.

This is the markets first solid opportunity since the October high to test meaningful support. Either, it bases here for a move back toward the 4.34% October high or fails and cuts much deeper, perhaps as far as the .382% retracement (2.86%) of the entire structural bear market. If the market does successfully base, the nature of the move should offer significant insight into the balance of the year.

Early in my career I was obsessed with Elliott . But after years of effort, I wasn’t able to develop it as a reliable trading methodology. However, those years led me to believe that markets do often move in three and five wave sequences. But if I can’t immediately identify an obvious primary sequence with a quick glance, then a count isn’t reliable enough to use. Even then it is only useful only for context and then only in conjunction with a broader understanding of price volume relationships and trend.

Bond yields appear to have completed a clear five wave move from the March 2020 low to the October 2022 high, leaving them vulnerable to correction and suggesting an intermediate high that should hold for several months.

10 Year Ultra Futures Daily: When a weekly chart is resting at an important juncture, I like to drop down to the daily chart in order to assess the likely hood of it holding or failing. For this view, in order to assess volume I switch from yield to price. Ultras are into a zone of strong daily perspective resistance defined by the confluence of the . 50% retracement of the 122-21 – 113-15 decline, the December 2022 high, volume profile , and the June 2022 pivot low @ 121-19. It is also taking more volume to produce gains, suggesting that supply is becoming more aggressive as the market moves higher. Three drives to a high (see linked related ideas) and the failed breakout above the 122-18 pivot all increase the odds of the resistance holding. A show of weakness that destroys the uptrend would strongly suggest a completed test and set the stage for a broader pullback.

Seasonal Tendency ( US30Y Futures ): Bond prices have very strong seasonal tendencies. They tend to set important intermediate highs early in the year before declining into mid-year.

Conclusions:

• The monthly/macro trend has changed from lower to neutral, but yields need to make a higher low before definitively making the case that the new trend is higher.
• The weekly chart is testing a solid support confluence. The outcome of that test should help define the markets behavior over the next 3-4 months. The weekly correction that began at the October high does not look complete.
• The daily perspective rally that began last October is faltering. Signs of supply are developing and reliable seasonal tendencies are turning negative (yield up/price down). When combined with a strong confluence of weekly support there is a good chance that yields will begin to move back toward their October highs.
• The characteristics of that rally will be important in determining if it is simply a test of the October high that eventually leads to a much deeper retracement (2.50% or so) or the beginning of a new leg higher.
• A failure to hold the support confluence would strongly suggest that a much larger retracement of the two year old bear market was unfolding. Targets for that retracement would fall in the 2.25-.50% zone.

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Originally Posted January 22, 2023 – Big Four Macro: Bonds Part 2

Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.