As we close today, I follow on from the weekend Diary note titled Diary- Week 74: Strike 3-You're Out?.
In this piece I noted that we had already had two very bearish developments on the long end of the curve (30-year yield) and needed just one more for "Strike 3" and an unequivocal bearish medium-term signal.
At the same time, I noted the "possibility" of a short-term bullish development.
Both these developments revolved around how we traded at this 4.845% pivotal level.
The bearish outlook (medium-term) is that we completed a 55-200 month moving average crossover (bearish price- yields higher) with both moving averages pointing up - strike 1
We also completed an outside month last month (lower low in yield than prior month followed by higher high followed by a close above the previous month's high at 4.68%- strike 2
There is now the possibility of a decisive break (at least weekly close) above horizontal resistance/double bottom neckline at 4.845% that would suggest a medium term move towards 5.75%- strike 3
As yet, strike 3 has not been completed but this week has important data that may determine if that takes place.
The POTENTIAL bullish outlook (short-term) is that we could be on the cusp of triple momentum divergence on the daily chart.
What on earth is that I hear you say?
Firstly, the market goes into overbought or oversold territory- Fixed income is oversold.
The on the yield chart we see a high, followed by a higher high, followed by a higher high. At the same time on momentum (slow stochastic) we see a high followed by a lower high, followed by a lower high.
We nearly have that today as the yield hit a new high and the stochastic is printing lower. However, to confirm we need a closing crossover of the %k line (blue) below the %d line (red) to confirm the lower high. That would happen if yields run out of steam here and turn lower (probably about 3 to 4 bp's) preferably tomorrow.
If that happens that would signal the danger of a further fall in yield with the area around 4.68% a likely target.
If yields head higher again tomorrow, we would likely not get the crossover and /or set a higher high on the stochastic thereby negating this potential.
This appears to make JOLTS and ISM services tomorrow pivotal in that respect.
