Surge in Yields Could Signal Resumption of Bigger Uptrend

Basic Elliott wave teaches us that there are two types of price movements: impulse and corrective. Similarly, Dow Theory teaches us that there are primary price movements and secondary price movements. Impulse and primary moves are in the direction of the bigger trend. Corrective and secondary price moves run counter to that trend. The challenge for chartists is to distinguish between impulse-primary moves and corrective-secondary moves.

The chart below shows the 10-year Treasury Yield ($TNX) with a huge advance from early May to early August. This key benchmark advanced from the 1.6% area to the 3.0% area, which is almost a double. Something clearly changed in the bond market and this advance looks like an impulse or primary price move. If so, then the decline from 3% to 2.5% would be a corrective or secondary price move.

Click this image for a live chart

Two technical aspects suggest that this is indeed a correction. First, notice that the decline retraced 38% of the prior advance, which is the minimum Fibonacci retracement expected for a correction. Second, the decline formed a falling wedge, which is typical for a correction. The three day surge off support suggests that this correction may be ending and the long-term uptrend is resuming. Notice how the 10-year Treasury Yield found support near the July lows and surged above 2.6% on Friday. A move above the wedge trend line would provide the second signal, while a move above the mid October high would complete a medium-term trend reversal. Also, notice that Aroon Up is above 50 and a surge to 100 would turn this indictor bullish. Chartists should watch the 10-year Treasury Yield closely because a breakout could have negative implications for the utilities sector, housing stocks, REITs and other interest rate sensitive stocks. 

Click this image for a live chart

Good trading and good weekend!
Arthur Hill CMT
Arthur Hill
About the author: , CMT, is the Chief Technical Strategist at Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed market technician. Arthur has written articles for numerous financial publications including Barrons and Stocks & Commodities Magazine. In addition to his Chartered Market Technician (CMT) designation, he holds an MBA from the Cass Business School at City University in London. Learn More
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