What is the Big Picture Behind the Treasury Bond Breakout?
The recent breakout of the 30-year U.S. Treasury Bond suggests that the treasury bond price may behave differently from the way it has retained for 20 years. The trend of fast rising prices of the treasury bond could have a significant influence on equity, commodity, and currency markets with a new puzzle of intermarket relationships.
Table of Contents
Bullish Divergence between the Broad Market Price and the LWX Indicator
The LWX Indicator in Last Four Weeks (Past)
The LWX Indicator in Next Four Weeks (Forecast)
The broad market resumed decline last week right after the short-term bullish time-window opened. The Broad Market Instability Index (BIX), measured from over 8000 U.S. stocks, jumped up to 196 (up from 54 the previous week) which is above the panic threshold level of 44 and indicates that the market is currently bearish. Based on the Leading Wave Index (LWX), a short-term bullish time-window is still projected to close on 6/11/2012 (see the second table above). The daily chart of the Wilshire 5000 index below has the price bars color coded with the LWX indicator. The current market status is summarized as follows:
Short-Term Cycle: in a possible upswing phase
Next Reversal Date: 6/11/2012
Broad Market Instability Index (BIX): 196, above the panic threshold (bearish)
Momentum Indicator: negative (bearish)
U.S. Treasury US Treasury Bond Breakout could Trigger Unusual Price Move
After it broke through the upper horizontal resistance line of the 9-month rectangular pattern, the 30-Year US Treasury Bond index advanced to a new high over 152. Based on the previous 9-month rectangular pattern, the price target of the current advance is estimated at 157 by measuring the height (146-135=11) of the rectangle and add it to the breakout (146).
However, this advance beyond the breakout could trigger unusual price move that we have never seen in last 20 years on the 30-Year US Treasury Bond. Let’s find out what it means from the next section.
Is this a Sea-Change Signal from U.S. Treasury Bond Breakout?
The chart below is a monthly chart of the 30-Year US Treasury Bond index in a 20-year time span from 1992 to present. In last 20 years, prices of the Treasury Bond moved in an orderly manner and price oscillation confined by two parallel upslopping trendlines which formed a uptrend channel. The slop angle of the lower trendline is about 30 degrees. Since last August, fast rising prices have been followed by a sharp trendline (pink line) with a slop angle far over 60 degrees.
This is a typical early stage of a possible “Bump-and-Run” formation (see here). Prices have been in the lead-in phase for about 20 years. The lower trendline of the uptrend channel serves as a lead-in trendline. The upper channel trendline serves as a warning line. In general, after prices cross above the warning line, excessive speculation kicks in and the bump phase starts with sharp price move until prices reach a bump height with at least twice the height of the lead-in uptrend channel. Last year, I discussed several times about “Bump-and-Run” patterns on silver (see here) and gold (see here). Those articles may give real market examples about how an early stage of the bump phase looks like.
The recent breakout from the warning line on the 30-Year Treasury Bond suggests that the 20-year lead-in phase has ended and now the bump phase is coming for next several years. If this trend continuous, we may see more powerful price move on treasury bonds that we have never seen in last 20 years. Such a significant price move on treasury bonds should impact equity, commodity, and currency markets, that could give us a puzzle of intermarket relationships among them for coming years.
S&P 500 Index is in a Descending Broadening Wedge Pattern
The S&P 500 index is in a Descending Broadening Wedge formation (see here) confined by two down-slopping diverging trend lines. The main characteristics of this pattern is that price movement becomes more and more volatile with a series of up-and-down high-waves. The rebound on the SPX one week ago has become a partial rise which is a bearish sign for prices going lower. My upside price target on the SPX was negated. We will see if prices can hold at the lower boundary of the wedge.
Shanghai Composite Index is Forming a Possible Head-and-Shoulders Bottom Pattern
The Shanghai Composite Index is still in progress of forming a possible inverse Head-and-Shoulders pattern. In general, the foreign markets recently performed much worse than the U.S. market. However, the Chinese market continuously performed better than the U.S. market (see the BRIC market performance table on the bottom of this page). The relative better strength of the Chinese market should support the recent bullish reversal of gold and silver.
Gold is in a Descending Triangle Pattern
The gold index has formed a Descending Triangle pattern (see here) with a falling resistance line and a horizontal support line. The descending triangle generally appears in downtrends. Price movement is choppy between the two boundary lines before a breakout from the either side of the triangle. Gold has had a powerful rebound from the horizontal support line of the triangle. The upswing could test the previous intermediate-term trendline. The upside price target is projected at 1675 near the trendline (the gray dotted line).
Silver is in a Descending Triangle Pattern too
Since April of last year, the silver index has formed a Descending Triangle pattern (see here) with a falling resistance line and a horizontal support line. A bullish reversal from the support of the horizontal line could set up the next upside price target at the upper boundary of the triangle around 32.
Bullish Rebound Continued on Gold/Silver Mining Stocks
Both XAU and HUI have bounced about 15% and 18%, respectively, from the lower boundary of their downtrend channels. The upside price targets for this counter-trend move are projected at the resistance from the horizontal lines of the previous descending triangle patterns, i.e., 175 for XAU and 480 for HUI.
Crude Oil Keeps Dropping
The crude oil keeps dropping and it has no pattern I can figured out here.
US Dollar Price Target Revised
The US dollar index extended its rally after it broke out from a four-month descending triangle. According to Bulkowski’s measure rule (see here) for an upside breakout of descending triangles, from the high price (81.50), the horizontal line price (78.25), the target meeting rate (84%) and the breakout price (79.75), the upside target price could be derived as 79.75 + ( 81.50 – 78.25 ) x 0.84 = 82.48. It looks like the US dollar is almost there with this target.
Asset Class Performance Ranking with U.S. Treasury Bond Leading
The following table is the percentage change of each asset class (in ETFs) against the 89-day exponential moving average (EMA89). Currently the U.S. Treasury Bond is outperforming. Crude oil is underperforming.
Sector Performance Ranking with Telecommunication Sector Leading
The following table is the percentage change of sectors and major market indexes against the 89-day exponential moving average (EMA89). The Dow Jones Wilshire 5000 index, as an average or a benchmark of the total market, is 5.22% below the EMA89. Outperforming sectors are Telecommunication (2.77%), Utilities (0.53%), and Biotech (0.31%). Underperforming sectors are Energy (-10.40%), Semiconductors (-10.27%), and Banks (-9.90%). The Dow Jones Industrial Average (-4.87%) is outperforming the market, and the Russell 2000 Small-cap (-6.54%) is underperforming.
BRIC Stock Market Performance Ranking with the Chinese Market Leading
The table below is the percentage change of the BRIC stock market indexes against the 89-day exponential moving average (EMA89), also in comparison to the US market. The Chinese market is outperforming and all other BRIC markets are underperforming.
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