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Classic pattern points to bond rally

Bond yields set to sink: BofAML technician

A telling pattern in charts of the two-year, five-year and 10-year U.S. Treasury yields indicates to one technical strategist that bond yields could sink in the first quarter of this year.

Paul Ciana, chief technical strategist and director of research at Bank of America Merrill Lynch, has observed so-called "head and shoulders" patterns in U.S. Treasury yields. This kind of pattern, from a technical perspective, describes a formation typically indicative of a bullish-to-bearish trend reversal, and that the end of an upward trend may be near.

"There's the tide, the ripple and the waves in the markets. … Right now, what we're looking at in these daily charts suggests that at some point in Q1, that U.S. Treasury yields will fall and correct some of that massive move that we saw in Q4 of last year," Ciana said in a Friday interview on CNBC's "Trading Nation."

As bond yields and bond prices move inversely, this would suggest a bounce in the bond market. Indeed, the bond market took a massive hit following the U.S. presidential election in November as investors bet on faster U.S. growth and inflation under President Donald Trump's tenure, ditching government bonds for equities.

"Most of [the patterns] were at the top of the right shoulder or starting to roll over a little bit, suggesting that there could be a bit of a decline here in U.S. yields," Ciana said, adding that five-year yields early last week broke — to the downside — an important technical level of 1.84 percent.

Such a level is notable because that represents the so-called "neckline" of the head and shoulders pattern; the U.S. five-year yield could fall even to 1.5 percent in a "full technical correction." The five-year yield hovered around 1.91 percent in Monday trading. To the upside, Ciana forecasted, the five-year yield could also rise to 2.35 percent this year.

And another technical marker in Treasury yields to watch, according to Ciana, is the 50-day moving average on the five-year yield (about 1.93 percent).

"If we see five-year yields lift through that over the next couple of days, this pattern is likely over," he said.