Bonds setting up for an extended sell-off?

November 3, 2015 09:27 AM

Bonds have been in an uptrend since 1981. That has not prevented them from having numerous selloffs in that process without changing the major trend.

But some selloffs have been more extended than others causing many to misinterpret it as a major top and major trend change when it wasn’t. It has been their pattern to set up for a more extended selloff when they have made new contract highs, followed by a near term correction, followed by another rally that cannot take out that new contract high. In short, they set up a temporary 1, 2 and 3 top formation. It is then that the market gets serious and completes the more extended selloff.

Before 2008 those extended selloffs averaged an additional 10 to 13 points. Since 2008 they have virtually doubled. There have been two since then and they have averaged 20 and 22 points respectively before the market took off to form new contract highs. 

Right now bonds have again set up a potential 1, 2 and 3 top formation on their monthly chart—just like before. It has not been confirmed yet but to help the “cause” their monthly chart also has a reversal top to add fuel to the flame, as the saying goes. Technically a reversal top is negative and suggests a trend change. So far that reversal top has been confirmed. Since that formation they have repeatedly violated the 10-day moving average on their monthly chart only to recover. As of this week they are under that average again.

That normally isn’t a good sign in any market since it suggests that market could be headed for the 20-day moving average that intersects currently at 149.00 in the bonds. But if bonds are setting up the potential 1, 2 and 3 top formation again, the extended selloff could just be starting and that could bring them down to the 143.00 area before they attempt to resume their long term uptrend. Unless, of course, this is finally a major top and major trend change occurring in the bonds. But based on their past history, I would not assume that just yet.

About the Author

Judy Crawford is a senior broker at Zaner Group. Raised in rural Minnesota, Judy went to the University of Minnesota and received a BA Degree in language. She specializes in technical analysis of the markets and write a market commentary entitled “Market Update” that is available to readers via e-mail. Sign up at her website: