Updated: 11-23-2015

Technicals for Treasury Sell-Off
Updated: 13-Nov-15  05:19PM ET
Analyst: David Kelland

From October 27th to November 9th, the 10-year yield rose from 2.01% to 2.38%. There has now been a 10 bp pullback to 2.28%, and the question we must ask is 'where next?' The pullback was driven by steady declines in equities and oil prices. The weak retail sales and producer price index data out on Friday had a relatively small effect. If the Treasury bears are to regain their footing and push the yield higher, they will have to do so soon. Break-outs require market participants to be caught offsides, and further rallying from 5's, 10's, and 30's will allow them to square up their positions and it would invite another breed of Johnny-come-lately short sellers who will be quick to cover on any move back to higher yields, thereby supporting prices and preventing dramatic declines.

During Friday's session, I put up a chart of the S&P 500 with its uptrend from the March 2009 low which remains firmly intact. I would eventually expect a break of this line, but it is holding for the time being and a struggle up to fresh highs appears possible. As long as stocks are not imploding, one risk of selling Treasuries is off of the table. I don't expect the trend to hold through next year because people are complacent and valuations in many names appear lofty, but I'm not a stock expert. The simplest interpretation of that chart is to not be long stocks or short Treasuries once the line has been broken, and becomes resistance.

As for the 10-year yield chart, the moving averages (21, 50, and 200-day) are too far below the current yield to provide much help (yellow, red, and green lines). I would not like to see the bulls make much progress off of the downtrend in yields (straight, red line) and it would be encouraging to see the ~2.258% high from March 2015 hold as support. It seems unnecessary, if this is actually a serious bear move, for us to revisit the range from the winter and early spring.

Lastly, the 30-year yield is in much the same position as the 10-year note yield, although it has regarded its potential downtrend in yield (around 3.06%) with much less respect. I have also drawn a speculative uptrend from the February 2015 low of 2.23% which roughly coincides with the 38.2% Fibonacci retracement of the October/November sell-off around 3.02-3.03%. The key here would be to sell low prices and cover lower prices. The further the rally runs at this point, the more bad longs get rescued from their losses and the fewer positions there are to blow out into a panic.

- David Kelland, Briefing.com

  • S&P 500 (Weekly):

10-Year Yield (Daily):

30-Year Yield (Daily):

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