Key Test Level to Watch Now in 10 Year Yields and IEF

Dec 1, 2010: 10:24 AM CST

The 10-year Treasury Note Yield rallied to a critical resistance level today, and the corresponding bond fund – IEF – fell to a critical support level today.

Let’s take a quick look at these important levels and play the “Will it Hold or Break-through” game, with targets to take note.

First, the 10-Year Treasury Note Yield Chart:

Keep in mind the way StockCharts reports yield – right side of the chart – is actually in reference to a percentage.  For example, 30 actually means 3.0%, and 24 (support) means 2.4% in Treasury Yields.

It’s important to make that connection.

And right now, the most important thing to know is that 10-year Treasury Yields are pushing up against the 3% boundary and ‘threatening’ to make a breakthrough.

It would be a slight embarrassment to the Federal Reserve should Treasury Yields rocket higher above the 3% level here – as their QE2 actions (buying Treasuries) are intended specifically to push yields down… so watch for a bit of ironic comic relief if indeed yields do crack strongly above the 3% threshold.

Take a look at the positive momentum divergence on the push under 2.4% in October – that’s often a sign of potential reversal, and so far we’re seeing the follow-through in higher yields after a divergence.

Whether or not this rally from October to present is just a ‘counter-trend retracement’ or the start of a whole new up-trend is depending on what happens at the 3.0% yield level – a sharp break above there – and namely above 3.1% (the 200 day SMA) argues for a trend reversal up in yields.

And of course, should yields fail to break above 3.0%, then we just witnessed a decent-sized retracement up into key resistance.

That’s why it’s going to be so important to watch the 3.0% level in the weeks ahead.

While you can’t trade yields, you can trade corresponding ETFs, and one of the most popular (aside from the TLT) is the IEF, which is the iShares 7-10 Year Treasury Bond Fund.

Remember that bond YIELDS (in percentages) are always inverse bond PRICES (in dollars), so while yields are threatening to break through resistance, prices are threatening to break down through support.

Here – take a look at the IEF Daily Chart:

The key to watch in the ETF is the $96 level which is similar to the 3.0% level in yield.  It is a thrice-tested price level that will give a strong clue as to whether to expect a continuation of the uptrend… or a reversal/switch in trend.

Downside levels to watch include the $94 level (200 day SMA) along with any weekly levels or prior swing lows.

Just as we had a positive momentum divergence in Yields going into October (forecasting a potential reversal), we had a NEGATIVE momentum divergence in prices at the October high.

So, while we’re here at the key levels, watch them very closely for clues of continuation (if they hold) or potential reversal (if they don’t).

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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