Bond Boundary 'Barriers' Have Powell Set-Up For June FOMC Meeting

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Includes: ACP, AIF, ANGL, ARDC, BGH, BIL, BSJJ, BSJK, BSJL, BSJM, BSJN, BSJO, CIF, CIK, CJNK, DFVL, DFVS, DHY, DLBS, DSU, DTUL, DTUS, DTYL, DTYS, EAD, EDV, EGF, FALN, FIBR, GBIL, GGM, GOVT, GSY, HIX, HYDD, HYG, HYGH, HYHG, HYIH, HYLD, HYLS, HYND, HYS, HYT, HYXE, HYZD, IEF, IEI, ISD, ITE, IVH, JNK, JQC, JSD, KIO, MCI, MPV, NHS, PCF, PHT, PLW, PST, RISE, SCHO, SCHR, SFHY, SHV, SHY, SHYG, SJB, SJNK, TAPR, TBF, TBT, TBX, TLH, TLT, TMF, TMV, TTT, TUZ, TYBS, TYD, TYNS, TYO, UBT, UJB, UST, VGIT, VGLT, VGSH, VLT, VUSTX, WFHY, WYDE, ZROZ
by: Gordon Long
Summary

The US 10Y note has reached critical technical levels that are likely to act as Boundary Barriers in the intermediate term.

The upcoming June 19th FOMC meeting is assuredly going to pressure these levels.

Chairman Powell and the FOMC may have a monetary strategy in mind, but the market is accordingly and knowingly prepared.

During the upcoming FOMC meeting and quadruple witch, we need to never forget that the sole purpose of markets is to "maximize pain to the maximum number of investors!"

The bond market is putting a lot of pressure on Fed Chairman Jerome Powell to start rate cuts in July and to signal such in the upcoming June 19th FOMC meeting. A meeting date two days prior to traders' often volatile June quadruple witch. To think that positions are not being taken for this "set-up" is to be naive. So what is to be expected?

Let's look at the technical Boundary "Barriers" for the 10Y Treasury note yield to see what Powell is contending with.

Boundary Conditions

First, we have annotated Bond Guru Jeff Gundlach's favorite market condition indicator. The ratios of copper/gold to the 10Y Treasury note yield.

We see from it some pretty strong technical evidence that yields may be very close to finding support and to begin some degree of counter rally.

One of our favorite Boundary Conditions for the 10 Year yield is SPX to TNX ratio plotted on a log scale. Once again we see we are at or very close to some strong resistance.

Support & Resistance

We do a lot of work at MATASII at identifying important support/resistance levels and zones which often trigger counter rallies of varying degrees.

After breaking through the TNX's long-term overhead resistance, we fully expected the long-term overhead resistance to be tested since technically what was "resistance" often becomes "support" after a breakout. Additionally, since the TNX was coming from its upper 12 and 24 MMA Bollinger bands, it is not unusual to complete a "Bollinger Cross" in completing the retest. The TNX is exhibiting all of these normal "bottoming" and "reversal" process characteristics.

The chart below was originally created in early 2018 as we approached highs in the TNX yield and has allowed us to effectively trade the drop in the 10Y Treasury Note.

The following chart's inception goes back even further and has been an outstanding performer for us at key inflection points. Currently it is signaling yield support at ~ 2.08% before initiating a counter rally to complete a potential "right shoulder," of what we suspect may be an intermediate-term unfolding "head and shoulders" pattern. If this is the case, the pattern potentially would deliver a final triple bottom. If this pattern turns out to be invalid, then yields are headed higher and for a longer period or the US dollar falls precipitously.

Bottom Line

The market has Powell trapped! US Treasury yields are headed higher in the longer term or the US dollar is headed substantially lower. Powell and the FOMC know this. They should be expected to sacrifice the dollar.

Despite what Chairman Powell says or does to manage this scenario, by the nature of the market, it is set most likely to trade short term in a direction least expected and which creates the most pain. That move is presently up in terms of yield or down in terms of price, crushing all those having recently executing the "safety trade".

But isn't that the sole purpose of markets - to maximize pain to the maximum number of investors?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.