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Where will bond yields end up\?

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While we wish we knew that answer for sure, here's one place that traders might look for an answer. We've been using the supply/demand charts to our benefit lately and some readers will remember a vertical count we performed sometime ago that may give us a clue.

30-year Treasury Yield Supply/Demand Chart - .25 scale.

When stocks or bonds begin hitting new highs, it's tough to get a feel for where things could end up. That's one of the things we like about supply/demand (point and figure) charts is the ability to perform vertical counts. The scale on the above chart is actually the yield multiplied by a factor of 10 so that we can actually chart the movement of yield using the principle of point and figure charting. On a downward count, we use the same equation for projecting a target with one exception. When calculating a downward projection we count the first column of O's, but instead of multiplying that number by 3, we multiply the number by 2 (we don't make the rules we follow them). After that calculation is done, we then multiply by the scale the chart is plotted on. The above calculation would be as follows. ((9*2)*.25)= 4.5. Then we take the box above that column of O's we just counted (59.25) and subtract the 4.5. With that, we come up with 54.75 or 5.475% on the Thirty-year treasury. Can we correlate this price objective with something that makes sense in a trading scenario?

30-year Treasury Yield - Weekly interval.

Taking our vertical count from the supply/demand chart we can look at a weekly interval chart of the 30-year Yield and find the following. For the week ending 4/18/99 we find a level of 54.72 (5.472%) that is very close to our price projection. Look what happened to yields soon after! What happened to stocks and what happened to the XAU.X soon after? We've run out of time here, but it's a place and time to start snooping for clues! If the recent relationship between the XAU.X the TYX.X and stocks hasn't gotten some traders thinking that there just may be a relationship between them then much of the work we've been doing is for not. Have an open mind and listen to the markets.

-Staff Analyst

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