I recently commented that bond prices had completed a bullish continuation pattern, suggesting further upside for prices, and therefore, a further downside for interest rates. I received some pushback suggesting that interest rates were at all-lows. How could I possibly see further upside for bond prices?
One of the great advantages of charts is that they don’t care what “should” happen (and that’s good, because it avoids what my therapist calls “shoulding all over yourself”) and are simply a picture of what actually has happened.
I’ve often found that the reasons as to why prices move in a certain way become much clearer after the fact. In the heat of the moment, it’s best to analyze movements in price and apply the technical toolkit to anticipate the most probable outcomes based on price momentum and market history.
So my response to a comment about rates being at all-time lows, similar to commodities plunging to long-term lows, is something like, “Never confuse the bottom of the page with support.”
This has been a standing joke with peers of mine. It’s so tempting to print out a chart that has come down to an extremely low level and try to anticipate the bottom by turning bullish on severe weakness.
Sources: StockCharts.com (chart), David Keller (stick figure diving)
The problem is that just because a chart has reached an extreme level, either going up or going down, never means that the trend can’t persist for way longer than you might expect.
In the case of the Ten-Year Treasury Yield ($TNX), the yield broke down through a key support level and just has not stopped since. This feels similar in some ways (from a technical perspective) to 2016 when yields continued to break through support levels despite becoming oversold in February of that year.
Oversold does not necessarily mean something is bottoming out, it just tells you that something has gone down. A lot.
Charts like this convinced me a long time ago to think like a trend-follower. Until I see some sort of stabilization/reversal/indication of changing sentiment, the path of least resistance is higher for bond prices. This sort of thinking has allowed me to watch charts like this with less concern and less anxiety because I know that when the trend is exhausted, the chart will let me know!
RR#6,
Dave
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