One thing that I learned as a bond trader for one of Boston’s largest banks in the 1970s is that the bond market is almost always correct—especially the two-year Treasury note. Its direction will lead the Federal Reserve’s actions.
It pays to follow the charts and not just the Fed’s words.
So what are the charts saying?
First...
One thing that I learned as a bond trader for one of Boston’s largest banks in the 1970s is that the bond market is almost always correct—especially the two-year Treasury note. Its direction will lead the Federal Reserve’s actions.
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It pays to follow the charts and not just the Fed’s words.
So what are the charts saying?
Source: The Institutional View
First up is a monthly closing chart of the two-year T-note yield. You can see formidable resistance in the 5% area dating back 30 years. (In November the yield reached 4.80%.) Notice the bearish divergence in momentum, as the yield made lower highs while also making higher highs. And now momentum broke its two-year uptrend—signaling that yields will be declining, just as they did in 2018 when the yield peaked at 3% and then sank to just 0.15%. Now we wait to see how much the two-year yield will fall this time.
Source: The Institutional View
Second is a weekly two-year T-note yield chart that posted a bearish reversal two weeks ago. Trading below the 11-week moving average for eight consecutive weeks (the longest since the two-year yield broke out in March 2021), a weekly close below 4.13% would confirm that the two-year had topped. Notice that momentum broke down already, piercing a 2 1/2-year uptrend.
Source: The Institutional View
Gold, with its strong rally, appears to be sniffing out a breakdown in the two-year T-note yield. Gold’s monthly chart, above, is one of the most potentially explosive charts. Within an 11-year trading range, gold posted a monthly bullish reversal off a nine-year trendline support. This was only the third monthly bullish reversal in 18 years. Monthly bullish reversals are rare—but when they occur, they mark accelerations to the upside.
With its advance off $1,615 an ounce, gold is in the initial leg-up on its monthly chart. While more basing action needs to be done, the price action has been excellent so far. If gold could hurdle $2,120—a big “if,” I realize—then my work would generate upside projections to $3,000-$4,000.
Andrew Addison is the author of The Institutional View, a research service that focuses on technical analysis.
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