Why The 10-Year Treasury Yield Could Drop Under 2.4%

With each passing day it seems the bearishness towards bonds refuses to ease. The surveyā€™s of economists still show a heightened distrust for the Treasury market, even though prices have marched higher for the bulk of 2014. When we look at the weekly chart of the 10-year Treasury Yield ($TNX) we can see that support may be under 2.4%, and if prices do in fact break 2.4% that may open the next wave of shorts to get squeezed.

Below is a weekly chart of $TNX going back to 2008. Iā€™ve included the 200-week Moving Average as it has been an important level of support and resistance for the 10-year Yield. In 2010 and 2011 we saw the 200-week MA act as resistance when bond prices were falling prior to the corrections in equities that took place each of those years. In 2013 we saw this long-term Moving Average act as support when yield was falling in October. And once again this MA acted as support in late May of this year when $TNX last approached the 2.4% level.

Once again we see yield approaching this critical level of support that currently sits at 2.38%. A break under 2.4% would shock a lot of traders. If we look at momentum, using the Relative Strength Index (RSI) we arenā€™t even close to seeing oversold conditions. During past bottoms in yieldĀ the 14 week RSI dropped to under 30. Of course itā€™s not a requirement for momentum to become ā€˜oversoldā€™ on this weekly chart for yield to rise, but thatā€™s been the case during previous intermediate-term bottoms.

tnxWhen we look at the latest batch of Commitment of Traders (COT) data in a chart from SentimenTrader we can seeĀ a lack of concern for Treasury yields continuing to fall, with over 3,000 contacts net-long. While the previous threeĀ bounces in yield have occurred when traders lessened their bets in favor of a higher yield down to under 200,000 contracts. There appears to still be too much optimism for yields to rise for them to actually do so.

COT tnxGoing forward Iā€™ll be watching to see how the $TNX reacts if it makes it back to 2.4% and the prior May low. If we do break under 2.4% then the 200-week Moving Average may come into play as the next possible level of support.

 

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

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