With Treasurys at Resistance, Will the Trend Hold?

Kevin has recently brought a great chart to our attention. He pulls up the iShares Lehman 20+ Year Treasury Bond (TLT) which is essentially the 20 year treasury in exchange traded fund (ETF) form. While some could argue technical analysis on this vehicle is a moot point, we still think there are some interesting observations as it has held numerous trend lines in the past.

This time around, Kevin has targeted $95 as the line in the sand for TLT. And, we completely agree with that. If you look at past trends for treasuries/bonds, you'll see that they typically put in a seasonal low around May or June. We are obviously right in the midst of that. What makes this interesting is that TLT is currently bumping up against its downward trendline (the red line), possibly set to breakout to the upside. This scenario would yet again solidify the seasonal aspects bonds have exhibited in the past. This might seem like mumbo-jumbo to some people, but it's still interesting to at least highlight.

Click to enlarge:

Currently, TLT is facing double resistance: from the downward trendline and also from the previous low established back in early May (the green horizontal line). So, watch this current area as a pivot point for the next big move in treasuries/bonds. If resistance holds, you can get short. If it breaks resistance, then get long for a trade. Either way, this vehicle often represents the inverse of the equity markets. So, a breakout in treasuries (people flocking to 'safety') would obviously be bad news for equities.

We saw this phenomenon in a big way back in October/November of last year. While it is unlikely we'd see that violent of a decrease in equities (and subsequent rise in TLT share price) again, the fact that numerous people have been calling for more downside is a cause for concern. This suspicion could possibly be confirmed if treasuries breakout to the upside. At the very least, it's an interesting indicator to monitor.

For additional thoughts regarding treasuries, make sure to check out hedge fund legend Julian Robertson's steepener swap play. That bet has sparked a lot of conversation in the debate as to which direction treasury yield curves are headed. Julian argues that they are headed 'steeper', while many others argue 'flatter' in a reversion to the mean trade. And, this is obviously very relevant because if TLT breaks out to the upside as hypothesized above, that would indicate the yield on the 20 year Treasury falling. (Remember, bonds have an inverse relationship between price and yield). Those betting on inflation and yields rising (by shorting TLT) have certainly had their way since the start of 2009; yields have risen and TLT has plummeted. Now it's time to see if the trend holds or not.

Comments

[Roger Knights:]

The chart shows a head-and-shoulders bottom on TLT. Shorts should set tight stops.

Jun 29 05:01 AM

[Macro_Man:]

This is very timely. The long bond has retraced a large part of the loss this year. These are the possible target points for this retracement...4.25%, 4.19% with perhaps an intraday low of 4.09%. After that the sell off of 2009 should continue. If one wants to short, one needs to wait for the near-term trend to change. Bulls shouldnt rush in if the resistance is broken, because it could only be a temporary "throw over" aka bull trap. The safest play at the moment is to stay on the sidelines and wait for the market to give us a clear signal either way. And I am betting this rally runs out of steam once we get to the 4.09% - 4.25% and get turned back....this translates into a point to 3 point gain in TLT approximately. If one choses to play, strict stop losses are essential

Jun 29 07:26 AM

[Mad Hedge F...:]

Now that the depression trade is off, I doubt it. For those who missed the 70% move in the TBT this year, the double short Treasury bond ETF, another window is setting up for you to get in. After running up from $35 to a meteoric $60, we have backed off to $50. Similarly, the bond futures, which plunged from 142 to 112, have bounced back up to 118.5. The yield on the ten year has backed off from 3.99% to under 3.50% in just a few weeks. I think the prospect of a retest of this year’s stock market lows triggered a lot of flight to safety buying of government paper in the last few weeks. If we don’t get that retest, which I think is unlikely, then it’s back to the races for the TBT. End of month, end of quarter, and end of half window dressing has also been goosing prices. Things certainly aren’t getting any better on the fiscal front. According to the Congressional Budget Office, the national debt is now growing so fast, that it will reach 100% of GDP by 2023, seven years earlier than was predicted only 18 months ago. Some 90% of the increase came from burgeoning Medicare and Medicaid spending. It seems that hardly a week goes by without Congress passing another humongously expensive package that has wonderful long term benefits for the economy and society, but has to be paid for with hard cash dollars up front. Watch the TBT.

Jun 29 10:36 AM

[beachcruiser:]

You might consider a course on tech analysis. There is NO head and shoulders bottom at all. You're missing a shoulder.


On Jun 29 05:01 AM Roger Knights wrote:

> The chart shows a head-and-shoulders bottom on TLT. Shorts should
> set tight stops.

Jun 29 04:53 PM

[Audio Tactics:]

"So, a breakout in treasuries (people flocking to 'safety') would obviously be bad news for equities."

It really depends on the causality. If treasuries break out, you could argue that the ensuing lower rates would be a positive for the stock market especially given the link between treasury yields and mortgage rates.

Jun 30 01:15 AM