Long Bond Breakdown

In our view, the most interesting action in the financial markets on Tuesday may have been the US long bond's breakdown to new post-December lows. That said, the breakdown may be an ending, not a beginning.

Readers may recall the conundrum we have been in. We have viewed the December-February decline as a five-wave Elliott Wave pattern. In "Plain English," that meant that it was probably the first leg of a larger decline. On the other hand, non-Elliott technical indicators such as sentiment and momentum suggested that the long bond was washed out or oversold. This would seem to limit -- and to a degree was contradicting -- our Elliott interpretation.

That conflict may be in the process of resolution. Tuesday's new low satisfied the Elliott implications. However, the downtrend from the March high appears to be a wedge. In Elliott Wave terms, that is a "diagonal triangle," which is an ending pattern. 1) If this is correct, then the long bond is close to completing an ABC decline from the December highs. 2) In turn, that would mean that the long bond is moving into position to benefit from the oversold sentiment and momentum background. 3) Finally, that "benefit" may be expressed by a rally that ultimately proves to be a Fibonacci retracement of the entire decline from the December high.

As such, fairly significant Fibonacci and chart resistance is in the 130-133 area. As for support, the "diagonal triangle" is now about 50% as long as the December-February decline and is also obviously in an area of important chart support. Second support is indicated in the 121 area.