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DOUBLE TOP ON THE FIVE-YEAR
Prepared by Technical Data
A Division of Thomson Financial Services
Weekly bar charts of five-year yields have shown strong evidence of a double top pattern. The pattern suggest yields can fall back to 5.12%, the lowest level achieved in 1996. Confidence in the pattern is strong because the market has been trading technically in the last couple of years. However, confirmation of the double top pattern has not yet occurred.
Fibonacci retracement relationships have played a large role in market action over the last couple of years. The two "peaks" of the double top pattern lie very near a Fibonacci retracement level that originates from the 1995 high at 7.94%. A 62% retracement of the move from that extreme to the low in 1996, 5.12%, marks 6.87%. This year's high is 6.87%; last year's high is 6.92%. The difference is slight enough to consider them equal for the purposes of the double top pattern. Between the two peaks is a "valley" low at 5.79%. Amazingly enough, this valley also has a Fibonacci relationship-it is where 62% retracement of the move from 5.12% to 6.92% lies.
These observations firmly demonstrate the market is respecting technical factors and should continue to do so ("if it ain't broke, don't fix it"). Thus, the double top pattern should be expected to push yields lower once the pattern has been confirmed.
To confirm the pattern, a move below the valley at 5.78% is needed. A break below this level needs to occur in the next month or so if the pattern is to retain its symmetry. Symmetry is not a critical element, but it helps increase confidence. Alternatively, if 5.78% limits buying activity, consider the possibility of either a large trading range or a triple top pattern. All of these patterns, especially the double top, require yields to stay below 6.87%. If confirmation occurs via a break of 5.78%, then yields can begin moving towards the patterns objective.
Generally, a double top will continue at least as far below the valley as the distance from peak to valley. However, in this case that formula establishes an objective at 4.66% which is too low because reversal patterns cannot produce a retracement larger than the preceding trend. Thus, the maximum target for this double top pattern is 5.12%.
A move towards this target is also endorsed by weekly MACD. A buy signal was scored on that study this spring. However, a break below the zero level on that oscillator is needed to confirm longer-term bullish implications.
July, 1997Chris Moore, Senior Fixed-Income Analyst
Technical Data
A Division of Thomson Financial Services
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