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Bond yield divergence signals financials sector rotation

September 20, 2013

Yesterday there was a sharp rally in long dated bonds. This article claimed it was a surprise and maybe it was, but these sorts of moves are more likely when charts are set up to suit them.

The US 10 Year T Note Yield has been setting up according to my RSI divergence criteria.

US 10 year yield – weekly

TNX weekly

  • The 14 week RSI has bearish divergence
  • The MACD does not have bearish divergence, which would have been more ideal. There was this more ideal set up in June 2006 and the yield fell until December 2006

US 10 year yield – daily

TNX DAILY
The 14 day RSI continues to have divergence and on 05 September, RSI was below 70, setting up according to my daily RSI criteria

My sell signal is a weekly close of the RSI below the intervening low. That looks likely at present. That low is 64.25 from 19 July (blue arrow).

The last divergence set up we had was picked out the September 2011 low. This was also not supported by a MACD divergence and only a short term rally ensued. So this may or may not mark a long term yield peak (hardly likely when you consider how much yields have fallen over 30 years) but what makes it more interesting is the financial sector rotation that comes with it.

iShares Real Estate (IYR) versus iShares Broker Dealers (IAI)

This is a rotation that should be helped by lower bond yields.

Weekly chart

IYRIAI WEEKLY

  • There is RSI divergence across the troughs against the February 2013 low and within the current trough
  • This week, the RSI moves above the intervening RSI high from 19 July (blue arrow) and a close above that high is a buy signal according to my RSI divergence criteria
  • Again, the absolute ideal scenario of MACD divergence does not exist, just as in March, when there was a five week rally

Daily chart

IYRIAI DAILY

  • The low was formed on 05 September with RSI above 30
  • Coming after previous divergences with RSI below 30, this conforms to my RSI divergence criteria (in conjunction with the weekly RSI status)
  • Also, there is daily MACD divergence

Pair trade

  • A long position in IYR against IAI will be opened on an end of week close for the RSI above the intervening high
  • The stop loss will be below the 05 September low

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