The Long bond indicated a bear breakout late last week. However, most breakout fail, says Al Brooks.
The 30-year U.S. Treasury bond futures have been in a tight trading range for nine weeks and a bigger trading range for four months. It is in Breakout Mode. More sideways price action is likely.
The 30-year Treasury bond weekly chart turned down two weeks ago with an outside down bar. Last week it went below that low and therefore triggered a minor sell signal (see chart).
However, the week reversed up on Friday and the weekly candlestick had a small bull body. Last week is therefore just another bar in a nine bar tight trading range. Because the body is small and there is a prominent tail on top, last week is a weak buy signal bar. There will probably be sellers not far above last week’s high. This is therefore probably not be the start of a major move up.
There is no sign on the weekly chart that the bond market is about to break out up or down. However, Friday was a big bull bar on the daily chart. There will probably be some follow-through buying next week.
Breakout Mode
A nine-week tight trading range is a Breakout Mode pattern. There is always both a credible buy and sell signal. Most often, there is both a small double bottom and double top. This is the case now.
It is important to understand that there is no breakout until there is a breakout. Continued reversals every couple of weeks are more likely than a successful breakout.
Since the trading range is about points tall, traders expect a seven point move either above or below the range. Traders should understand that the probability is about the same for the bulls and bears. Furthermore, the first breakout up or down has a 50% chance of reversing.
Do not forget the monthly chart. It has been making a major top over the past several years. There is no strong reversal down yet. Also, the bulls might get another minor new high. However, bonds will go down and interest rates will go up over the next 20 years. The nested wedge top on the monthly chart is clear and strong.
Weak selloff trading range
Even though the weekly chart has been drifting lower for four months, the selloff is weak. It lacks consecutive big bear bars closing near their lows. Furthermore, there have been several bull bars closing near their highs on the weekly chart since the August top. Also, many bars have prominent tails and overlap the prior one or two bars. Finally, there are reversals every one to two weeks.
When a selloff has these characteristics, it typically does not go far. This type of price action is more common when the selloff is a bear leg in what will become a trading range.
A trading range also has bull legs. Therefore, traders will continue to look for minor reversals every two to three weeks.
Since there is not sustained buying or selling, traders are taking quick profits. While the weekly chart is in an early bear trend, the trend is a broad bear channel. It is also a bull flag. Traders trade it more like a trading range than a bear trend. They buy low, sell, high, and take quick profits.
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