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Back in October I wrote a piece titled, Are US Treasuries About to Rally or Implode? At that time, I noted that the chart for long-term US debt was forming what could have either been a challenge to long-term support, or a potential head and shoulders pattern.

The main idea was that the market was about to tell us whether or not investors considered US Treasuries a safe-haven anymore. If they did, long-term debt would rally. If they didn’t, the potential head and shoulders pattern would be confirmed by a break below the “neckline” which would trigger a major sell-off.

Well, we DID break support. Indeed, in late December it even looked like the “neckline” for Treasuries had been violated. But then stocks took a nose-dive and investors plunged back into US debt as a safe haven.

Put another way, Treasuries did a head-fake. They lured the bears into believing that the neckline was violated and that US debt was about to collapse… but then quickly regained their support line, shredding the bears and re-asserting that, despite our reckless monetary policy, investors still consider US debt to be a safe haven (if for no other reason than we have a money press and can simply print cash to ensure the return “of” capital rather than a return “on" capital. Yes, this matters during a crisis, as 2008 proved).

So, here we are in February and the exact same set-up has occurred. Once again Treasuries are bumping up against long-term support:

But they could just as easily be primed to break below their neckline:

Which will it be?

I can’t tell you (no one can). But, given that demand for long-term US debt has fallen off a cliff (not to mention that China has actually openly discussed potentially selling Treasuries), the potential for a “neckline” violation followed by a serious sell off (to 110 or lower) is higher than it was back in October.

However, we could just as easily see stocks take a nosedive, which could precipitate a flight to safety that could push Treasuries back up to 122 again. Really the only thing to do here is wait and let the market dictate to us.

As I stated last month, Bonds, not Stocks will be the BIG Story of 2010. We’ve already seen the beginnings of a Crisis in the Euro. A Crisis in the Dollar is not out of the question. For those of you who take an abstract approach to your investment philosophies, the trend-line for long-term US bonds can be seen as representing the line of “confidence” in the US. If bonds fall below it, confidence has been lost and we may be witnessing a full-fledged flight from US debt (which is what the recent long-term bond auction seems to be warning).

Conversely, if bonds stay above this level, then we know investors are still willing to put their money with Uncle Sam if for no other reason than he has a printing press handy.

Forget Greece, forget the Euro, forget stocks. Keep your eyes on long-term US debt. It’s the proverbial “canary in a coal mine” for virtually every other investment class in the US. If long-term debt collapses, the Dollar is in trouble and stocks might temporarily rally (the ensuing spike in interest rates would quickly crush this though). However, if long-term debt rallies, the Dollar should jump and stocks/commodities should take a serious hit.

In tomorrow’s essay I’ll detail where Gold fits into all of this. Gold, of course, is a commodity, but ultimately it’s a currency. The question is whether investors are really beginning to see this (a flight from paper money is underway) or if they still see Gold as some kind of anti-Dollar hedge and nothing else.

Source: U.S. Treasuries: Heading for a Rally or an Implosion?: Part 2