Bloomberg News

’Evening Star’ Guides U.S. 10-Year, RBS Says, Technical Analysis

October 06, 2011

Oct. 6 (Bloomberg) -- An “evening star” trading pattern indicates Treasury 10-year note yields are poised to rise after the securities reached overbought levels this week, according to Royal Bank of Scotland Group Plc.

“As 10-year yields approached and went through 1.75 percent, it reinforces our range thinking that the bottom of the range is 1.70 to 1.75 percent for the foreseeable future, unless facts change or change significantly,” said William O’Donnell, head U.S. government bond strategist at the bank’s RBS Securities unit in Stamford, Connecticut, in an interview.

The yield on the 10-year note dropped to 1.756 percent on Oct. 3, the lowest since its record low on Sept. 23. It closed at 1.82 percent the next day and 1.9 percent yesterday, which formed an evening star pattern on a candle chart by a sharp drop in yields on the first day, followed by a correction on the second and third days.

“What this pattern indicates is that we could have a deeper correction and the next level in 10-year yields may be 2.06 percent to 2.12 percent in the next two to three weeks,” he said. “Buyers should be patient and wait for cheaper levels than we see today, especially with supply next week.”

Yield Path

The yield on the 10-year note rose today to 1.97 percent, the highest since Sept. 30. The yield touched a record low of 1.67 percent on Sept. 23. The Treasury Department plans to sell $32 billion of three-year notes, $21 billion of 10-year debt and $13 billion of 30-year bonds in auctions next week.

“There are signs as evidenced by this pattern in particular that we got into deep overbought conditions and now that’s being unwound,” O’Donnell said. “It indicates a shift of power where the bulls had control on Monday; Tuesday was the battle between the bulls and the bears, and Wednesday tells you that the bears won.”

The risks to the forecast are further European financial deterioration or weaker-than-forecast U.S. economic data, O’Donnell said.

In technical analysis, investors and analysts study charts of trading patterns to forecast changes in a security, commodity, currency or index.

--Editors: Paul Cox, Dave Liedtka

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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