From the July 01, 2010 issue of Futures Magazine • Subscribe!

Tech Talk: Are bonds ready to collapse?

All major cycle trends eventually come to an end. Historians then step in to attempt to determine the cause of the reversal. When the 29-year-old uptrend in the Chicago Board of Trade 30-year Treasury bond futures comes to an end, the ensuing analysis will be no exception.

Given chart action in long bonds over the past 2.5 years, we wonder if the death knell of that powerful rally initiated in October 1981 could be about to ring. Not only have bond prices traced out what could prove to be a long-term head and shoulders top, but the current symmetry of the pattern could be an indication that the next significant move could be on the downside.

One fundamental justification for higher rates would suggest an improving economy and a demand for new loans. But there is another theme that could justify higher rates. With the recent proliferation of bad credit and the increasing potential for defaults in sovereign, state, and municipal entities, it’s possible investors demanding higher rates for the assumption of greater loan risk could also cause interest rates to move upward. In other words, rates could move up without any commensurate increase in loan demand.

Chart

To validate the head and shoulders top, the long bond would have to decline below the “neckline” near 114 on increasing volume. That level has increased significance as it also would indicate a break of the long-term trendline. If that level is breached, a minimum downside target of 87 would be possible.

Robert McCurtain is a technical analyst, market timer and private investor based in New York. His market analysis can be seen daily at FuturesMag.com. E-mail Robert at traderbob@nyc.rr.com.

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