Interest Rates: Breaking Out?

With the usual caveat that I’m not a bond guy (seriously, what’s the point?) I took a fresh look at interest rates on the 10-year note.

The obvious downtrend over the past 15 years is well-captured by the purple channel below.  It has been marked, however, by a series of rising white channels, some of which I have charted.

When rates fell below the channel bottom last May, it might have ushered in a new, steeper decline suggested by the falling red channel.

However, since bottoming in July, TNX regained the purple channel bottom, backtested it, and has put in a series of higher highs and higher lows that precisely echoes the slope of the previous channels.

Its latest feat is pushing up through and backtesting both the red channel .75 line and the purple channel .25 line.  In the process, it has climbed back above the white channel midline and faces the psychologically important 2% mark yet again (the red, dashed TL.)

From a harmonic standpoint, TNX looks well-positioned to test 2.28% in the next month.  Note that the July lows completed a Butterfly Pattern at the 1.272 on the purple grid and a Crab Pattern on the 1.618 on the white grid.

Note the precise turn at the .500 Fib level, hinting at a Bat Pattern completion at the .886 of 22.83.  The .886 intersects with the purple channel line late next week — though the precise placement of such a long-term channel is always subject to some interpretation.

To get there, however, TNX will have to push back through 20, the .618 Fib line at 20.14, and the top of the red channel – currently around 21.34.

The RSI picture is promising.  The weekly chart shows the positive trend, regardless of whether you subscribe to the pessimistic (yellow channel) or optimistic (purple channel) view.

A close-up of the above chart shows steadily improving relative strength since April 2011 and an important reversal at the midline.  The intersection of the white and yellow channel tops looms out there around April 3.

The daily RSI, in addition to showing a steadfast refusal to become overbought, shows the recent break above the yellow channel’s 25% line.  Provided RSI can push through the dashed red trend line (corresponding with the .618 and 2% price levels discussed above), there is plenty of room to run.

The intersection of the yellow midline and the purple channel top is around March 20.

Like many markets, TNX is at a critical juncture.  It’s put up or shut up time.  A push through 2% would likely usher in 2.28% in short order, followed by a backtest of the red channel and subsequent push higher.

If we expand the white channel (yellow, above) we get a glimpse of what the upside case looks like.  A turn at the red .886 would intersect with the .382 Fib of a harmonic grid drawn from the Feb 2011 highs.  The .618 of that pattern — not all that distant from the red 1.618 — would intersect with the midline of the yellow channel at 28.46 around the middle of August.

A return to the top of the purple channel, currently around 3.4%, could come as early as July, but a more moderate case would be between Oct 2013 and Jan 2014.


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