Update on the Yield Curve Inversion Battleplan
Updated
Background
My first idea where I lay out a yield curve battle plan was published 13 months ago. It was by no means perfect but I found it quite useful. I used it to buy the dip the market was experiencing and then when I was not seeing the follow through to a new all-time high I went back into safer assets (except for my crypto play money). The last idea looked at the spread between the 10 and 2year US Government Bond and this one will be looking at the 30 and the two year. The spread on 30 versus 2 years isa lot more stable than the 10 and 30 and right now I find it is the more usefulmeasure.
Main Chart
The main assumption is that the process of the yield curve inverting is has extraordinarily complex ramification for the global financial system…. That are simply ultimately bearish. The complexity initially drives prices up and then when the curve reasserts prices are driven down. You could get lost in the weeds and look at the repo market, or how DXY pumping may affect trade balances and rotations int markets and all that. Which is fine.
But I am looking for something simpler. The most important thing to recognize is that the classic blowoff top and bull trap formation performed with a lot of fidelity to a ABC correction. A zoom in and view of the weekly chart shows a lot of strong buying right at the 2.618 level
The 1989 and 2006 inversion did not have clear topping structures like we see from the dotcom pop and the current double top (which putting in its lower high) Compared to the dotcom pop those were baby crashes in time and intensity. A zoom in on the current price action of NDX and the bond spread shows that we have had bearish reversal candles on NDX and growing green candles on the bond spread. It almost looks like the spread pair is in a W pattern and the ratio should be getting close to 2%-ish again.
Double Tops
Double tops have a take-off, a first high, a valley that links the first high to a second high, and then a sell off. Often the sell off returns price to the take off point. The tops do not need to be symmetrical. They can be “Eve and Adam” or “Eve and Eve” tops. Right now it isn’t clear that type of double top we are in. It could be a Eve and Adam or a Eve and Eve. Even more formally, until price returns to the neckline we don’t even have a confirmed double top and we are just in early pattern recognition. The whole process of a double top can take a long time.
Here is a bitcoin double top from last bear market on the 12-hour time frame. It took 60 days to return from the take off point. If I am right about being in the middle or beginning of the second top, then this pattern is only halfway or so to getting to target and over-performance is another matter.
Conclusion
If this idea is accurate once we see the 30- and 2-year US government Bond spread turn positive again we can expect a bear market/recession. We already had two quarters of GDP declining which for the longest time was a technical definition of a recession until “for some reason” people decided that wasn’t the definition anymore. Now also have numbers coming out of government agencies that people don’t trust because they don’t trust the Administratum and we are looking at chart formations and the yield curve for a real view of what is happening in the economy.
And it is pretty bearish.
My first idea where I lay out a yield curve battle plan was published 13 months ago. It was by no means perfect but I found it quite useful. I used it to buy the dip the market was experiencing and then when I was not seeing the follow through to a new all-time high I went back into safer assets (except for my crypto play money). The last idea looked at the spread between the 10 and 2year US Government Bond and this one will be looking at the 30 and the two year. The spread on 30 versus 2 years isa lot more stable than the 10 and 30 and right now I find it is the more usefulmeasure.
Main Chart
The main assumption is that the process of the yield curve inverting is has extraordinarily complex ramification for the global financial system…. That are simply ultimately bearish. The complexity initially drives prices up and then when the curve reasserts prices are driven down. You could get lost in the weeds and look at the repo market, or how DXY pumping may affect trade balances and rotations int markets and all that. Which is fine.
But I am looking for something simpler. The most important thing to recognize is that the classic blowoff top and bull trap formation performed with a lot of fidelity to a ABC correction. A zoom in and view of the weekly chart shows a lot of strong buying right at the 2.618 level
The 1989 and 2006 inversion did not have clear topping structures like we see from the dotcom pop and the current double top (which putting in its lower high) Compared to the dotcom pop those were baby crashes in time and intensity. A zoom in on the current price action of NDX and the bond spread shows that we have had bearish reversal candles on NDX and growing green candles on the bond spread. It almost looks like the spread pair is in a W pattern and the ratio should be getting close to 2%-ish again.
Double Tops
Double tops have a take-off, a first high, a valley that links the first high to a second high, and then a sell off. Often the sell off returns price to the take off point. The tops do not need to be symmetrical. They can be “Eve and Adam” or “Eve and Eve” tops. Right now it isn’t clear that type of double top we are in. It could be a Eve and Adam or a Eve and Eve. Even more formally, until price returns to the neckline we don’t even have a confirmed double top and we are just in early pattern recognition. The whole process of a double top can take a long time.
Here is a bitcoin double top from last bear market on the 12-hour time frame. It took 60 days to return from the take off point. If I am right about being in the middle or beginning of the second top, then this pattern is only halfway or so to getting to target and over-performance is another matter.
Conclusion
If this idea is accurate once we see the 30- and 2-year US government Bond spread turn positive again we can expect a bear market/recession. We already had two quarters of GDP declining which for the longest time was a technical definition of a recession until “for some reason” people decided that wasn’t the definition anymore. Now also have numbers coming out of government agencies that people don’t trust because they don’t trust the Administratum and we are looking at chart formations and the yield curve for a real view of what is happening in the economy.
And it is pretty bearish.
Comment
The double top situation continues to look bearish. Price is now in between the weekly MACD EMAs bearishly which is the position it was at the beginning of the sell off in late 2022. Another such sell off and it will look like price returns to the neckline of the double top.Comment
The three week chart below closes in the next day. It clearly seems that the spread is moving to positive and SPX is rolling over. It is going to be a rough couple of years.Comment
Looks like price has evolved into a descending triangle on the weekly. More downside to follow. The fib predicts draw suggest a relatively quick move to the blue zone. This descending triangle is forming the top of our second top and with the MACD cross on the weekly suggest in the long run we will get a lot more downside form here.A even wider view has a very rough two years ahead.
Comment
The descending triangle on the second top appears to be breaking down. Bad news bears for equities.Comment
As this idea has developed the NDX has taken out its previous ATH and is begining to stall. This stall is within 5% of the previous ATH and so we are still solidly within my double top senaior I have been watching.The idea we are topping is further supported by what we see going on with the 30-2 year yield curve. It has formed a pretty inverse head and shoulders with a neckline at zero. Practically every bear market in equities has been preceded by the yield curve inverting then normalizing. A break of this inversion, predicted by the inverse head and shoulder suggest equities will top.
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