The 10-year Treasury yield sits at a critical juncture. What the charts say will happen next
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The Federal Reserve will tell you it is data dependent. This is true: The committee responded to roaring inflation in historic fashion, raising rates eleven times out of twelve meetings from March 2022 to July 2023. But there’s a much bigger factor at play, one that we know very well – the market. The market, in the Fed’s case, is the 10-year Treasury yield . Just like a stock chart won’t tell us much about a company’s impending earnings report (especially if the actual numbers are much different than estimates), the chart of the 10-year yield can’t predict what the Fed will do at any particular meeting. However, for both stocks and bonds, the charts can help us understand the underlying trends, patterns and the pertinent support and resistance levels. The first thing to consider is this: The 10-year yield has been leading the Fed since 2018. And over that time, there have been two major inflection points: In October 2018, the 10-yearrate started to roll over and continued to fall through most of 2019. The Fed followed the market’s lead but didn’t start to cut until July 2019 — eight months later. Then Covid-19 hit and crushed them both. Coming out of Covid, the 10-year yield bottomed in August 2020 and kept going … the FOMC finally acquiesced, but not until March 2022, initially believing that inflation was transitory. Aggressively playing catch-up for 16 months was a major factor in risky assets crashing. Most recently, the 10-YearYield has been trading between 3.8% and 4.2%, the top of which is close to its prior 2022 peak. Thus, on a net basis, it’s flat over the last 16 months. Is it any surprise that the Fed also has “paused?” And now with the Fed rumored to be closer to cutting rates than raising them, they will be — once again — looking for the 10-year for guidance. What the current technicals say That takes us to the current technical set-up. And coincidence or not, the 10-year yield is at a critical spot chart-wise, trading just below two converging resistance lines … the uptrend line that starts at the August 2022 low and the horizontal line that extends from the October 2022 peak. Quite simply, failing to punch above this zone would keep the downward action in play, be a tailwind for stocks and encourage the FOMC to cut rates soon. Looked at another way, the 10-Year yield has repeated this pattern since the 2020 summer low: Uptrend (green) Steep uptrend (light blue) Rectracement (red) Repeat After the recent downturn in rates from last fall, we’re now back at the stage when another bigger upswing in rates (green) SHOULD commence again. If that fails to happen this time – and rates roll over – the Fed would be more apt to cut rates down the road … and vice-versa. Lastly, here’s a very long-term chart going back to the 1960s. The most important part is this: from mid-1980 through early 2022, the 14-month RSI didn’t hit overbought territory once. The spike in 2022 changed that, and we’ve seen overbought conditions pop up a few times since then. The same type of action happened in 1965, when the first overbought reading in five years eventually led to higher rates for the next 15-plus years (and additional overbought readings). Ironically, the 10-year yield is around the same level now as it was in the 1960s. While this may not factor into this FOMC decision, or even matter for the rest of 2024, we should keep this blueprint in the back of our minds going forward … especially if inflation does return at some point. -Frank Cappelleri Founder: https://cappthesis.com DISCLOSURES: (None) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
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