Wednesday, April 29, 2009

Fed, Consumer Spending Boost Rates

Despite a -6.1 Gross Domestic Product showing for Q1 2009, markets chose to focus on a 2.2% increase in consumer spending. When the Fed chimed in saying that the end is in sight, 10 year note rates broke through the 3% level and 30 year rates broke 4%.

The daily rate chart above shows the evolution of this move. Since the last Fed meeting when rates dropped to 2.5%, rates traded in a tightening pennant formation until last week. Two times after breaking out of the pennant, rates came back to test the upper pennant levels but held firm. It was no surprise that rates finally picked up some momentum on the upside.

Despite the apparent strength, today's move caused rates to jump to an overbought level. Notice also that rates are near the upper boundary of a possible channel. That's not to say that rates can't go higher. I would expect rates to respect this channel for the moment and perhaps fall back to the moving average before breaking higher.

The weekly chart shows a similar picture. Rates have reached the upper boundaries of a declining channel. Again, this resistance level must be respected. Earlier work discussed in previous blogs indicated that rates could possibly go to 3.2 and to 3.6% by June.

Weekly volatility is starting to rise and can increase a lot just to reach the average level. Rising Volatility requires one to stay with the trend, which is up. Short term trading opportunities might exist over the next few days and a retracement to a trendline could occur before some news provides an impetus for rates to break through strong resistance levels.

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