The Treasury bond market seems to have moved too far too fast, which makes a short-term setback likely, but should also present a good opportunity to buy on the correction.
Monday’s strong gains caused some improvement in the short-term technical outlook for the stock market. A close in the S&P 500 above 1288.50 on positive breadth will help the bullish case. The price action in the long Treasury ETFs and too-high bullish sentiment indicates that, for now, the Treasury market may have a higher risk than stocks.
Earlier in the year, Bill Gross, the head of PIMCO, the biggest bond shop, turned bearish on bonds because he was expecting rates to rise. Instead, the yield on ten-year Treasury notes peaked at 3.73% on February 8 and has since plunged to a low of 2.87%.
As the global stock markets turned lower in May and the precious metals collapsed, investors turned away from risk and the flight to Treasuries picked up steam. Of course, adding fuel to the fire has been the end of QE2 and increased Eurozone debt worries. Money has also been moving out of high-yield, or junk bonds, as fears of a new recession have made these bonds too risky for some investors.
Supply has also been reduced, as the Treasury department has been issuing fewer T-bills so that it can stay under the hotly debated debt ceiling. Recently, the aversion to risk has caused the yield on the three-month Treasury bill to drop to 0.013%.
The short-term technical action suggests to me that now is a high-risk time to buy Treasuries, but examine the support levels below to discover more favorable entry points.
Chart Analysis: The chart of the iShares Barclays 20+ Year Treasury Bond Fund (TLT) shows that rates did rise a bit on Monday, and TLT closed lower. It is now testing the short-term support (line a). The fund has a current yield of 4.2%.
- On a close below $95, TLT is likely to decline to the 38.2% support at $94.10. TLT made a low in February of $88.14, so the 50% support stands at $92.90
- The long-term uptrend (line b) is now just below $92. Over the past six weeks, the Starc+ bands have been tested several times and were followed by a pullback. Remember, when prices are at the Starc+ band, it is a high-risk time to buy
- The daily on-balance volume (OBV) has closed below its weighted moving average (WMA) with next good support at line c. The weekly OBV (not shown) is still positive
- Resistance for TLT is strong in the $97.15-$97.74 area with the major 50% retracement resistance at $98.70
The Proshares Short 20+ Year Treasury (TBF) is the inverse ETF based on the same bond index as TLT. It has an expense ratio of 0.95%, which is high for most ETFs, though not for short Treasury funds.
- TBF has tested the support in the $41.10 area (line g) several times in June, but it closed with nice gains on Monday
- A move above the resistance at $42.15, line f, would complete a short-term bottom
- First upside targets are in the $43.20-$43.30 area, which corresponds to the 38.2% retracement resistance and the downtrend, line e
- There is stronger chart resistance and the 50% resistance at $43.80
- Volume has picked up over the past two days, but the OBV is just barely above its weighted moving average and still well below its downtrend, line h
- The weekly OBV (not shown) is negative, but it is also oversold
The iShares Barclays 7-10 Year Treasury Bond Fund (IEF) is up over 6% from the April lows, but it closed last week very close to the daily Starc+ band. IEF closed below Friday’s low on Monday, which is a short-term negative.
- There is first good support at $96.99, and if that support is broken, it would signal a drop to the $96 area
- The support from the March highs and the 50% retracement level are now in the $95.10-$95.30 area. This also corresponds to the current level of the weekly Starc- band
- The OBV has formed a slight negative divergence, line b, and has dropped back below its weighted moving average. This is a short-term negative formation. Good support stands at line c
- The weekly OBV is positive, although it is overextended
- There is now resistance at $98.20-$98.40 and the daily Starc+ band
Short-term debt instruments have also been attractive, as the iShares Barclays 3-7 Year Treasury Bond Fund (IEI) has rallied from an April low of $113.60 to a recent high of $118.67. The daily Starc+ band was tested last Friday.
- There is first support for IEI at $117.90 with further support at $117.20. The 38.2% support level stands at $116.60 with the 50% support at $115.90
- The OBV is still strong, as it is well above its weighted moving average, and good OBV support resides at line d
- There is weekly resistance from November 2010 at $119.50
What It Means: The sentiment and price outlook for the Treasury market indicates that prices have moved too high too fast, which makes a setback likely.
There are no signs yet that any of the long bond ETFs have completed an intermediate-term top. Therefore, a correction back to the 38%-50% support levels should be a buying opportunity, and I like the iShares Barclays 7-10 Year Treasury Bond Fund (IEF) the best.
The short-term action in Proshares Short 20+ Year Treasury (TBF) suggests a quick opportunity on the long side for short-term traders.
How to Profit: For the iShares Barclays 7-10 Year Treasury Bond Fund (IEF), look to buy at $95.88 with a stop at $94.82 (risk of approx. 1.1%). Cancel the order if $98.20 is hit first.
Short-term traders could buy Proshares Short 20+ Year Treasury (TBF) at $41.74 with a stop at $40.83 (risk of approx. 2.1%). Sell half the position at $42.96 and raise the stop on the remaining position to $41.28. Cancel the order on a move above $42.15.