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Technical Take: Jan. 15, 2020

Brian’s Technical Take

In recent MIDDAY Updates, we have been highlighting the similar price patterns in both the 10YR UST and 10YR German Bund yields. Both yields made 52-week lows on September 3rd and have since been in a trend of higher lows converging into a clearly defined horizontal resistance level (ascending triangle). Our expectation was for a bullish breakout to new six month highs.     

We updated the setups in Friday’s MIDDAY Update (1/10) and noted the upside “bullish breakout” in the 10YR German Bund yield, as expected, however, the 10YR UST yield did not accompany it. This led the spread between both yields to drop to two year lows. In fact, since early last week, the long UST yield has repeatedly been oscillating around its 50-day sma, which over the prior three months had acted as a reliable support level. Today the long yield is dripping lower to a “last sale” of 1.79%.    

A break below the 50-day sma may simply suggest the 10YR UST yield may need more time before resuming the prior Q4 uptrend, however it could also suggest investors are becoming more risk adverse as the equity market continues to melt higher in the face of good and bad news. 

Time will tell how this plays out but the sideways chop in yields appears to be good for the defensive groups, in particular utilities. In the November 11th MIDDAY Update, and reiterated two days later in the November 13th MIDDAY Update, we noted “Utilities was the worst performing sector so far in Q4 but we felt the pendulum had swung too far the other way and the group was ready for a rebound.” At the time the sector ETF, ticker XLU, was testing a cluster of technical support, momentum (32 daily RSI) was approaching oversold levels, while the long UST yield was just beginning to roll over from tis first test at clearly defined resistance. 

In hindsight November 11th proved to be THE low for the quarter, and now two months later the XLU has gained more than 8%. This week’s +1.6% gain is breaking out to new all-time highs signaling the prior multi-year uptrend has resumed. It remains to be seen whether or not new highs in the defensive utilities sector is a “bearish divergence” foreshadowing a looming correction in the broader equity market, a rising tide lifting all boats, or some other. This is what makes markets.

Originally Posted on January 15, 2020 – Stocks Higher as U.S.-China Trade Deal Signed

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