Bond Yield Very Overbought

We have been observing how, in spite of the Fed's efforts, bond yields have been persistently rising, but now they have become very overbought.

On the weekly bar chart, we can see how a reverse head and shoulders pattern is in progress and yield is headed toward a minimum upside objective of about 42.5. However, we also notice that the PMO (Price Momentum Oscillator) has reached its highest level since 2009, and that it has begun to decelerate. If the weekly PMO tops, yield will probably top as well.

To put it into better perspective we have to look at a really long-term chart going back to 1948. Here we see that the weekly PMO has reached the second highest level in over 60 years. Does this mean that yield is about to experience a violent reversal? We don't think so.

In more than 60 years there has never been a situation resembling this one. There has been a decline of over 30 years terminating in the formation of a broad based double bottom, and there is also a PMO positive divergence. To us, this setup is bullish, and the PMO up move from its 2011 low is evidence of an initiation of a new long-term rising trend.

Conclusion:  While we believe that yield is in the process of changing the long-term trend from down to up, markets never go from one point to another in a straight line. As overbought as things have gotten, there will probably be a period of correction or consolidation so that the PMO can become less overbought.

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Technical analysis is a windsock, not a crystal ball.