Bonds And The Dollar: Cycles And Trends Review

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A detailed look at where bonds and the Dollar are in relation to the long-term trend.

A guide for future price action.

Fourth article in the series providing a complete guide to trends in all asset classes.

Continuing the series looking at trends and cycles in various markets, this article focuses on bonds and the dollar.

Bonds and the Dollar are correlated due to interest rates, but are very different cyclically. It is important to understand what they may do as it will have a knock on effect in nearly every other market.

Once their cycles are defined, I will collate all the articles so there is a complete guide to the markets in one place. This will allow projected moves to be compared.

As in the other articles, I am using Elliot Wave and fractals to define trends, potential reversal points and future expectations. I explained the basic Elliott Wave concepts here, and there are many free resources on the web. Elliott Wave provides a framework to define stages of a trend and guide expectations.


Anyone with even a passing interest in bonds will know there are strange things afoot. Negative yields are spreading across the world, with Swiss government 50-year yields hitting negative territory last month.

This is the blow off stage of the trend, where fundamentals and sound reasoning don't seem to matter. It looks as if there is no alternative but to buy at the highs.

That said, the chart patterns remain clear and denote weakness. As much as this feels like a bubble, the price structure is telling a different story.

The iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT)

I will use the TLT to represent the long bonds. The 10-year (IEF) and the 30-year notes have very similar cycles, but TLT has the clearest pattern and contains some interesting fractals.

I already covered TLT cycles in the July article, 'TLT: The Ending Diagonal Is Nigh' and it seems we have got the reversal I suggested was due.

This pattern is an ending diagonal and its presence on the weekly chart tells us there is a very long-term cycle coming to an end.

Since TLT has an inception date of 2002, we have to look at the actual 20-year yield to see further back in time. This reveals the channel and the trend sequence completing.

On the daily chart, from the 2015 lows there is another ending diagonal pattern. This helps form a shorter-term view for entry and gives us added confidence that the cycles in higher time frames are completing.

This has been an interesting chart to trade and analyze as the three rallies for waves '1', '3' and '5' are fractals; the price action is repeating. It also means the correction we are now in may follow the previous corrective sequences in '2' and '4'. Indeed, it appears as if price has already repeated some of the correction after wave '3' and is currently at the arrow shown.

If the similarity continues, price should make another low, but ultimately go sideways onto the channel, where we assume there is a breakdown. We cannot expect price to repeat forever, especially after a longer-term cycle has completed.

There are calls for a meltdown in bonds, but this is not my immediate expectation as it has too many consequences across all asset classes. My cycle work elsewhere does not suggest an immediate crash.

Reversing such a long-term downtrend can take time, something already shown to us by the dollar, and it is the dollar where I take my guide.

The top chart is the 10-year yield, and the bottom is the DXY. As a rough guide, there may be a slow initial rally, but nothing significant is projected for long bonds until 2018.

The Dollar

I use the Dollar index, DXY, or the PowerShares DB USD Bull ETF (UUP) to set context for most of the Dollar pairs I trade (mostly EURUSD, AUDUSD and USDJPY). The Dollar has so much influence over every asset class it is an important consideration to any analysis.

Before we look at Elliott Wave cycles, the longer-term view is helpful. There is a different reaction to rate increases dependent on the location in the trend.

The Dollar reached an all-time high of 164.72 in February 1985, followed by a decline for 7 years into a 1992 bottom. Then, in 1993, the economy began to emerge from recession and Treasury rates slowly increased. The Fed chair, Alan Greenspan, responded with the now infamous tightening cycle of 1994. The rest is history, as they say, and by 1998, the Dollar had rallied 25% and bonds had been routed.

Current price action and context is not identical (it can't be), but there are similarities: the Dollar again bottomed in a range following a 7-year decline. Again, the recovery from recession and a shift in Fed policy led to a 26% rally. We haven't seen a rout in bonds and rates are still low, but the ending of QE and the first hike in a decade are clearly significant.

Given the backdrop of another raise at some point, coupled with weakness in the Eurozone and Japan, we could expect further gains and similarities to the Dollar move in the late 1990s and early 2000s.

The initial target is $103.15, where there is a confluence of measurements. This is where waves 1 and 5 are equal in length, and the large wave (3) = 1.618* wave (1).

This is a very clear cycle, perfectly contained in a trend channel. I am confident in the target as long as the channel holds.

Once $103 is tested, I would expect the channel to break and a period of corrective declines. Nobody really knows what this cycle will look like, but the Dollar is full of repeating price action, and it is not hard to find a historical guide.

The above price action is from 2012-2014 and is a guide I have been using for nearly two years. Here is the same fractal used to give targets back in 2014.

I'm only showing this for added evidence. Many may think a repeat of previous price action is a bit farfetched, but I called the Dollar rally back in 2014 based on fractals such as this.

Putting it all together

The bond rout in 2013 and its relation to the Dollar is actually a good place to look for a guide to both markets. Not only is the Dollar following the price action of the 2013 rally on a larger scale, it may also be giving us clues to what will happen in bonds in the future.

The Dollar rallied 6% from February 2013 to April 2013 while bonds generally stayed steady. Bonds only took off after the Dollar pulled back for its wave 4 in May 2013.

This apparent lead by the dollar over bonds was touched on earlier in this article, as the 10-year from 2012 appears to be bottoming in a similar way to the Dollar from 2008.

The longer-term expectation is for yields to stay steady until 2018, followed by a large rally. As already mentioned, the expectation for the Dollar is a move to $103 followed by a wave 4 pull back into 2018.

If, in 2018, bonds and the Dollar are configured in a way, which in any way resembles May 2013 in the chart above, look out; yields could rocket.


Bonds and the Dollar are correlated, but do not move in tandem.

Long bonds such as the 20-year may have topped, but this does not mean a crash is on the horizon. Yields could stay low till at least 2018.

The Dollar could continue its rally to just above $103 before a pull back into a 2018. I will continue to monitor the patterns and correlation as there is the potential for a very large move in both markets.

This is the fourth (and last) in a series looking at cycles across the market. Earlier articles in the series are linked below. In my next article, I will simplify and collate the charts so that there is a complete overview of the market, which can be easily tracked. Here's a preview based on today's article:

Article 1: Equities

Article 2: Precious metals

Article 3: Oil and gas

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Disclosure: I am/we are short TLT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.