Old Resistance Holds with $TLT

It was weird..just a few minutes ago I was scanning through some charts on FreeStockCharts and noticed that TLT, the 20+ year long bond etf, stalled out an upward advancement right at a green line that had been marked on the chart last summer.  Marking certain charts with red and green lines used to be common practice for me.  I haven't done it in a while but I do like to look at where price action is compared to old support and resistance lines..especially when price reverses right at one.  Check out the chart:

Hopefully all of you are not just holding up but also profiting from this market.  Volatility can be a great thing for certain styles of trading.  I think the worst is likely over, but you never know.

TLT

Interesting Spread Trade: The Yield Curve Steepener via ETFs

It goes without saying that there's been some interesting trading in bonds lately.  We all know that bonds, especially treasuries, are in a bubble.  The big question is: when does it end?  Some pros have already called the top in bonds and others say there's no telling how low the fed will bring down yields.  What I find to be interesting is the relationship between the shorter term bonds versus the longer term bonds. 

Here's a chart of SHY, which is the Barclays 1-3 Treasury Bond fund etf:

Notice in this chart that prices took a small dip recently but have retraced most of the fall and appear to be ready to re-test their highs.  I would state that this is a pretty bullish looking chart.  Now compare that to the daily chart of TLT, the Barclays 20+ year bond fund etf:

This price action in TLT has taken a dip just like SHY, however, it has failed to rebound at all.  In fact, it appears to be testing it's uptrend and is looking dangerously close to entering the 3rd Stage of a trend which is the top prior to the Stage 4 crash.  The weekly chart of TLT looks quiet bearish, however I'm going to leave it up to you to look at it as I don't won't to overdo the number of charts in this post. 

One last chart that is interesting.  This is a weekly pair chart of SHY and TLT together.  So when looking at this chart, for the price to go up, SHY would continue to go up and TLT would go down, or SHY would go down but TLT would go down more.  Here's the chart:

In the above chart, you can see that I highlighted 3 different areas of price action.  The first is "Normalcy" which is where prices of SHY:TLT have been during relatively stable times.  The "Nervous Market" area is where prices have been when the market is concerned about another severe crash..where we are now.  "End of the World" is where prices went when it looked like the financial system was going to break down all together..that was as bad as things could get without a collapse of the entire banking system. 

The question is:  do we think it's likely we'll go back to the "End of the World" zone or will bonds trade back to the Normalcy area?  Short of a Sovereign default or something outrageous happening, I'm betting we trade back to normal levels and maybe even overshoot those levels if people panic and dump their treasuries.  Time will tell.

TLT

Close!..but not quite there yet

It's no secret that Treasuries have been hot lately..the only question is:  when will it end?  TLT nearly registered a sell signal today..coming very close to flipping the V-Stop on the daily chart.  The next few days should be interesting because TLT is also oversold on the Stochastic.  If you're in the camp that believes that Treasuries will continue to rally, this is the time to be loading up.  It is a great risk-to-reward entry point for the longs.  That being said, I'm on the other side, as I've been short via TBT for two weeks now.  I've just got beginning small position on and I will add to the position a couple of times after the V-Stop flips..if it flips.

The great aspect of this trade is the potential for treasuries to crash hard if/when they begin to fall.  Be extra careful if you happen to own any bond mutual funds or bond etfs.  I told my grandfather to consider unloading some of his bond funds into this strength (just some, not all) and his brilliat financial adviser told him that the bond funds won't drop until interest rates begin to rise.  Excellent advice!  Can you pick up on my sarcasm?  I pointed out that it's not when interest rates begin to rise that will be the problem, it's when the market begins to believe that interest rates could rise...and whenever that happens, it will happen quickly.  The important reason to unload bond funds into momentum is because there's the rush to exit scenario that could be very likely and in this day in age (post flash crash and 2008 days) we all know that you don't want to sell when you feel you have to because it will already be too late. 

Hope everyone's having  a great week so far.

TLT

Watch Bonds and Utilities

Here's two trade ideas for the new year. Keep an eye on both bonds and utilities. They tend to have an inverse relationship and both are interest rate plays. Longer term bonds (and short term as well) have been pretty bearish lately and are looking like they are heading for a steep decline in the near future. Here's the chart for Barclays 20+ year bond etf (TLT): If that support at the 87.70 gets taken out, expect a sharp move. What's moving bonds lower? Long term interest rates are moving higher after hitting record lows. Bond traders are anticipating higher long term rates, creating a steeper yield curve. As long as bond traders believe this, bonds will fall.

Utilities (XLU) look poised to pop right now, which acts as confirmation of the short bond trade. Utilities have been incredibly strong during the month of December and now, after a little consolidation, they look ready for a move higher. Here's the daily chart of XLU:The bond market is saying that the stock market is heading higher and utilities are confirming the bond trade. I'm currently short bonds (via TBT) and I might take a position in XLU if it drops down to the buy zone that I highlighted above.

One thing that I want to touch on real quick is the relationship between bonds and utilities. I stated that they tend to have an inverse relationship and that this is because they both are interest rate plays. Don't just take my word for it, lets take a look at it. Here's a 1 year chart showing the relationship of TLT and XLU:I'd say that the above chart shows a pretty close inverse correlation.

As always, we'll see how this theme plays out. I hope everyone has a Happy New Year!

TLT