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Bollinger Break Suggests Notes Overextended: Technical Analysis

The 10-year Treasury note’s drop today below the resistance level implied by the security’s lower Bollinger band suggested the rally in government securities is “overextended,” according to Jefferies Group Inc.

The yield on the benchmark note moved below its 3.288 percent Bollinger band, reaching as low as 3.205 percent, the least since Dec. 1. The security’s 14-day relative strength index measured 29.6. An RSI level below 30 or above 70 suggests the yield may change direction.

“Right now the market’s on a momentum run that’s taken us to these levels,” John Spinello, chief technical strategist in New York at Jefferies, said in a telephone interview. “Technically, I think we’re definitely overextended. I don’t think it’s a breakout situation because there wasn’t a lot of volume up at this level. If anything it’s just an extension of the move we had over the last two days.”

The firm is one of the 18 primary dealers that trade with the Federal Reserve.

Bollinger bands are designed to alert investors when a security rises too high or falls too low by comparing its price to the average level over the past 20 days. The system of analysis was created in the 1980s by John Bollinger.

As investors have fled risk and sought a haven in Treasuries from turmoil in Europe, the U.S. 10-year note has gained more than the two-year note as the longer-term security’s higher yield has made it more attractive, Spinello said.

The difference in yield between the notes has narrowed to 2.53 percentage points from 2.84 percentage points on April 2. With the two-year note now yielding 0.71 percent, investors “don’t want to buy the front end so they’re buying the back for yield,” Spinello said.

In technical analysis, investors and analysts study charts of trading patterns to forecast changes in a security, commodity, currency or index. Resistance is a level on charts where orders may be clustered.

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