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A 2013 Bond Market Prognostication: Why a Breakout Appears Likely


Plus: What are the levels to watch next year?

This week, I want to address two technical developments in the bond contract that focus on this 150-00 pivot level, which will hopefully help guide you in trading for 2013 in both the bond market and likely the stock market as well.

Click to enlarge

Since the lows near 115-00 in 2010 that ironically coincided with the end of QE I, the bond contract has been in a very definable rising channel and the center regression line of this channel runs right into the 150-00 level as it ends 2012. This week's low just above 146-00 also happens to be one standard deviation from this regression line, no doubt helping provide support on both price and relative strength. This lower standard deviation also provided support at the March low earlier this year at the same RSI. The 2011 rally from 120-00 to 145-00 was bracketed by the lower and higher two standard deviations of this regression. For these reasons, I believe this channel will continue to provide support and resistance into 2013, and a break from two standard deviations in either direction should not be faded.

If the Fed Is Controlling the Long End of the Curve, Then Why Is It Trending and Responding to Technical Levels?

Even though the contract has only consolidated the 150-00 pivot over the past six months, it didn't just appear as the market was making new highs in June. It first showed up in 2009 on the reversal after the blow off top due to the 2008 financial crisis. The 150-00 level is an exact 1.236% Fibonacci ratio extension of the reversal from the 143-00 2008 top to the 113-00 2009 low. This is actually a natural area for the market to target for a number of different technical patterns.

In fact, Fibonacci shows up in many of the pivots, supports, and resistance areas since the 2009 low. The 143-00 level didn't just mark the 2008 blow off top; it also was an area of intense consolidation in late 2011 and early 2012 as the contract vibrated and twice tested support at the 2010 highs of 136-00, which was another Fibonacci level.

It's really remarkable that the famed dead Italian could be playing such a prominent role in the price action of a market that is supposedly being manipulated by the Fed. This tells me that the market has structure -- and despite a consensus assumption that the Fed is in control of interest rates, the bond market is not only trending, but is still on a cyclical mission. This big question for investors is whether this cycle is ending or has more room to run.
No positions in stocks mentioned.
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