Take a look at this…
What do you see?
Don’t worry. It’s not a Rorschach inkblot test. It’s a sign of weakness. Let me explain…
Technical analysts look at the relationship between price and volume when making judgments about the strength (or weakness) of a price trend.
To illustrate, let’s look at the following chart of 10-year Treasury bond futures. This market has been in a long-term uptrend. It’s up over 55% since 2007.
The bottom of the chart – the pink, black and blue mountains and valleys – looks at price and volume variance. The black portion of the lower graph compares the current price of bonds against an “average.”
The black mountains show when bonds are overvalued. The black valleys show when bonds are undervalued.
The blue mountains and pink valleys are analyzing volume – that is the number of bond contracts traded. The blue mountains show above average volume, while the pink valleys show below average, weak volume.
This is important to know because volume is a proxy for investors’ enthusiasm. Heavy volume naturally means investors are active. Weak volume means there’s less interest to trade.
A basic tenet of technical analysis: Be suspicious of rising prices on weak volume.
Another look at that chart above shows us it’s time to be suspicious. Bonds are showing this phenomenon right now. Look…
Ben Bernanke is the biggest buyer the bond market has right now, but Operation Twist ends in June.
Watch out. The bull market in bonds looks very vulnerable.