Eyes on Income: A Big Week for Rates?

07/29/2013 10:30 am EST

Focus: INCOME

Thomas Aspray

, Professional Trader & Analyst

At the start of a very busy week for the economic calendar, MoneyShow’s Tom Aspray takes a technical look at interest rates and the bond market.

The FOMC, Bank of England, and the European Central Bank all meet this week, which may make jittery bond holders even more nervous. In addition, as I outlined in the Week Ahead column there is a full slate of economic data that could also move rates.

Many bond holders are likely dreading their July portfolio statements as many who bought bond funds were focused only on safety and yield. The prospect of significant capital losses was not a concern then, but is a real problem now for many.

The weekly bottom formation in T-bond yields outlined in the premier Eyes on Income column was completed before the end of May and pointed to higher yields. This formation took over 16 months to develop so rates could move higher for some time.

Of course markets and rates do not move straight up or straight down. There were signs in late June that rates had formed a short-term top but last week rates spiked so the yield on the 10-year T-note is still in its trading range. But this does not mean income investors should not take action, and there is one stock that I think should be added to the current Eyes on Income portfolio.

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Chart Analysis: The weekly chart of the 30-year T-bond yield shows a reverse head and shoulders bottom formation.

  • The formation was completed on May 31 by the close above the neckline, line a.

  • This formation has upside targets in the 4.000-4.200% area.

  • The weekly starc+ band was tested in mid-June, as well as early July and is now at 3.900%.

  • There is initial support in terms of yield at 3.498% with further at 3.400%.

  • The neckline is now in the 3.200% area and a retest of the breakout level is always possible.

The 10-year T-note yield shows that the yield hit a low of 1.624% in early May before rising to a high of 2.725% on July 5.

  • The daily uptrend, line b, was broken on July 19 and last week yields retested the former uptrend.

  • Yields hit a high of 2.634% last week before closing at 2.561%.

  • A close below the key support at 2.460% will complete the daily top formation.

  • The initial downside target is in the 2.300% area, which is the 38.2% Fibonacci retracement support.

  • The 50% support level stands at 2.173%.

  • The daily MACD formed a negative divergence at the recent highs, line a, before dropping below its prior lows.

  • The MACD-His dropped below the zero line on July 12 and is still negative.

  • The weekly MACD analysis (not shown) is positive so that daily sell signals indicate a pullback in yields that should be followed by another move higher.

NEXT PAGE: A Pick for the Eyes on Income Portfolio

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The Select Sector SPDR Utility (XLU) hit a low of $35.80 on June 21 and closed last Friday at $39.35 as it has gained almost 10% from the low.

  • The next resistance is in the $40 area and the daily starc+ band.

  • The quarterly R1 resistance is at $40.47, which corresponds to the mid-May highs.

  • The 2013 high is $41.44 but XLU has an all-time high at $44.66 from late 2007.

  • The daily on-balance volume (OBV) moved through its resistance, line c, on July 11, which was a positive sign.

  • The weekly OBV (not shown) is also above its WMA.

  • There is initial support now at $38.48 (line a) and the 20-day EMA is at $38.68.

  • The quarterly pivot is at $38.13 with more important support in the $37.20-$37.60 area.

Exelon Corp. (EXC) is a $27.09 billion diversified utility company that has a current yield of 3.90%. Its dividend was reduced as part of its 2012 4th quarter earnings report. It has a current ratio of 1.12, which is positive regarding their dividend. The dividend cut was designed to spur future growth.

  • EXC reports earnings on July 31 and the latest short interest report showed an increase of over 14%.

  • This suggests that weaker earnings are expected by those on the short side.

  • EXC broke through its downtrend, line d, in the middle of July and rallied close to the quarterly pivot at $32.65.

  • The daily OBV did form a positive divergence at the lows, line e.

  • This suggests that shares were being accumulated as EXC was dropping to its low of $29.44.

  • The OBV turned positive by moving above its WMA on June 11 and is holding well above its rising WMA.

  • There is short-term support now at $31-$31.40.

What it Means: The stock index futures are lower early Monday as is the dollar, and the Nikkei 225 was hit hard on Monday’s session as well.

Rates are pretty much unchanged in early trading, but I am still looking for a further decline in rates over the near term but then higher yields longer term. There is still no conclusive technical indication of a change in the major downtrend.

A decline in yields will mean higher bond prices and give those whose bond commitment is too high a chance to reduce their exposure at better levels. If instead, yields close above 2.634%, it will indicate that the uptrend in yields has resumed.

Exelon Corp. (EXC), I think, is a good addition to the Eyes on Income portfolio (see below) if we get the right price.

How to Profit: For Exelon Corp. (EXC), buy $2,500 of EXC at $31.38 or better and $2,500 at $30.72 or better, with a stop at $29.66 (risk of approx. 4.5%).

Portfolio Update: Per the June 10 column, I recommended buying $2,500 of Select Sector SPDR Utilities (XLU) at $37.88 or better, and $2,500 at $37.04 or better, with a stop at $34.88. Use a stop now at $36.36. XLU paid a dividend of $0.3705 per share on June 21.

NEXT PAGE: The Eyes on Income Portfolio

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