Watch for Falling Bond Prices

Ten-year Treasury-bond yields rose sharply – in other words bond prices fell sharply – from May to September as investors prepared for the Fed taper that never happened.

Now I see three technical indicators that suggest bond yields will rise once again over the coming weeks.

Here’s a chart of 10-year Treasury bond futures. Remember to invert your brain when you’re thinking about yield. Falling bond prices equals rising bond yields.

See larger image

The rise in bond prices from September to November was a short-term, counter-trend move. Interestingly, this counter-trend was halted at the end of October… precisely in the Fibonacci range where counter-trend pullbacks are expected to end (see dotted white lines in chart above). While that zone doesn’t prevent prices from rising higher, it’s a natural level to watch for a resumption of the dominant trend, which is now down.

After topping out in late October, bond prices formed a bearish head-and-shoulders patternrn. The right shoulder, which is the right-most pink circle in the chart, shows the bulls’ inability to push prices higher than the late-October peak.

That’s a bearish omen, so watch for declining prices once the neckline is broken to the downside. Because bond prices are currently just at the neckline that could happen in a matter of days.

Finally, the Relative Strength Index (RSI) is currently sitting at 40 on a scale of zero to 100. Typically, bullish markets find support when RSI hits this level, allowing prices to continue higher. With RSI currently at 40, a break below this level in the coming week would add further evidence that bond prices will continue to decline.

We’ll have a clearer picture over the next week or two. For now I’m staying on guard for rising interest rates and falling bond prices. You should too.

Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.