A Retest or Bear Trap?

The 10 year Treasury bond yield found a bottom last July and rose almost 100% in 5 short months. Since topping and forming negative momentum divergence in mid-December, the yield chopped around in a sideways consolidation until mid-April where the 2.34% critical support eventually level failed. 

As we know, frequently when price (in this case yield) breaks below a critical support level, it will often back-test that same level immediately after the break. If that back-test holds, it will typically give the bulls a chance to exit their positions and then see the bears take complete control pushing it lower. Of course, nothing is that easy otherwise we would all be gazillionaires. In addition, there are times when the back-test slices right through the support line like it wasn’t there and climbs higher. This is a classic “bear trap” as investors who shorted at the breakdown are now holding a losing trade (“trapped short”).

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As you can see, yields are currently back-testing the underside of critical support as it sits within a cats whisker of it. I pointed out the break down in a past blog post and called an “all clear” to get back into bonds expecting the market to normalize rates lower. We are within a week or less before we find out whether the market is going to prove me wrong and trap yield bear or reverse course and restart the fall in rates (or increase in bond prices since they move inversely)