US10Y: Seeking 125.0, Again

10Y Benchmark Treasury Note prices rallied on Friday following a much weaker than expected US Housing Sales figures, which pushed USD weaker and Gold higher. Speculators bet that this heavy miss would scare the Fed members to rethink their gusto about the need to taper in 2013. However, it seems that the rest of the market does not really believe in the handful of speculators, with prices continuing to look bearish despite price breaking above the 125.0 key level.

Hourly Chart

From a technical perspective, the rally last Friday did not manage to test the 125.40 support turned resistance. Furthermore, prices dipped lower immediately in the next hour, suggesting that there is a knee-jerk component in the rally. Prices did manage to push up higher towards the end of last week trading session, but even that is not enough to overcome the 125.20 soft resistance which was the ceiling found on 19th August.

Today started bearishly, with prices immediately heading lower towards the soft support of 125.05. This is significant as traders would have had the weekend to digest the news event, and it seems that rational traders believes that prices should be heading lower. Stochastic readings shows that price is currently in a bearish cycle right now, however readings are extremely close to the Oversold region. As we have not really achieved any significant bearish breakthrough today, it is possible that prices would still be able to push up slightly towards 125.2 once again before a stronger bearish breakthrough happens.

Weekly Chart

Weekly Chart shows prices trading below the July swing low, suggesting a potential bearish extension of the original 128.0 breakout. However, Stochastic readings are already within the Oversold region, suggesting that it would be difficult for price to move to the next level of significant support around 122.0 on this move alone.

From price action alone, last week’s candle formed a Hammer, which would generally be a bullish reversal signal especially since price managed to clear the 125.0 round figure to end the week on a slightly bullish note. Hence, this morning’s early bearish sell-off is indicative that overall long-term pressure is firmly on the downside, despite price remaining above 125.0 currently.

Moving forward, the September FOMC meeting will be keenly watched, and may present upside risks for 10Y Treasury prices. This is because many traders have already priced in a Fed tapering action, which explains why prices are extremely depressed compared to 1 year ago. As such, should FOMC does not follow through on market expectation, we could see bond prices pushing sharply higher while an actual tapering action may be less muted. That being said, Fed’s taper is a matter of “when” and not “if”, and hence do not be surprise to see a return of bearish impetus especially if 128.0 continue to hold in spite of a September non-action by the Fed.

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