Update on Bonds: Mar 07, 2013

If rates really are heading back up in the near future, we’d expect to see bonds take a hit (and stocks, too, but that’s a different post.)  Back on Jan 21, we focused on the 10-year treasury (ZN.)

We observed that ZN had just completed a large Crab Pattern and broken down from a rising wedge, and appeared to be due for a “significant retreat.”

The chart below shows a big Crab (grey), followed by another Crab (red), a Bat (white) and another Crab (purple.)  Each previous Crab Pattern completion has been followed by a significant retreat, so we might suspect one here with the purple pattern completion.

Since then, both the purple and white channel lines have broken down, suggesting more downside ahead. The intersection of the white channel bottom and purple channel midline is coming up in early April, and prices have fallen from 132’160 on Jan 21.  But, where’s the “significant retreat?”

Shifting focus to the 20-year as represented by TLT (just for grins), the charts show continued weakness over the next couple of months — provided TLT can push through some important support.

The harmonic picture is negative enough – given the potential Gartley or Bat Pattern in play. But, the white and red channels have both recently surrendered a support line.  Backtests are complete, and the next support is down around the .786 at 114.5 — though I suspect the .886 at 112.26 will get the nod.

Note that it intersects with the falling white channel midline, the falling red channel bottom and the large white rising channel midline — all around late May-June.

A slight overshoot would tag the .500 at 110.18 on a larger harmonic grid (purple) and establish a Point B for a pattern that might lead prices back down below the white midline.

The fly in the ointment?  Check out the dashed red trend line cutting across the middle of the chart. It has influenced a few turns, and is just below current prices at around 115.60.

Stay tuned…

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