Sentiment Speaks: If TLT Rises, The Fed May Lower Rates

Summary

The market leads Fed action.

Based upon the recent "topping" structure in the TLT, it suggests we still see higher levels.

If the TLT is likely going higher in the coming months, then it is likely the Fed will follow and lower rates.

As I have written many times before, I believe that the Fed follows the market and does not lead it. In fact, you can read my last article on the matter right here, as it explains this perspective using many historical examples.

So, in following up on this perspective, let’s see if we can answer the question presented in the title to this article.

For those that have been following our analysis on bonds, we successfully called the top to the bond market back in 2016, and then re-entered the long side of the bond market when Treasurys (NASDAQ:TLT) dropped just below 113. Our initial expectation was for a rally to the 124 region, followed by a pullback, and then expected that we would rally next to at least the 128 region.

But, now, that 128 target may have to be pushed off in time.

At the end of March, as we approached the 127 region, my charts highlighted the 126.70 region as the “ideal” target for wave 3 off the early March lows. You see, wave 3 of a 5-wave structure often targets the 1.618 extension of waves 1 and 2. And, that level was 126.70, with the TLT striking a high of 126.69 before it turned down. That is why I personally exited all my leveraged positions (options) on TLT when we struck that level.

As I have highlighted many times before, I know of no methodology that provides a better framework for understanding a market better than Elliott Wave. And, when the market approaches at target for a 3rd wave, it is often advisable to exit leveraged products as they will lose a lot of value during the ensuing 4th wave pullback as it often eats up a lot of time.

In our case in TLT, I have to say that the drop below the 124 region has made this pullback much deeper than a standard 4th wave. This has opened up the potential that the high we struck in late March may actually be an expanded [b] wave.

You see, from an Elliott Wave perspective, a rally that completes in only 3 waves does not suggest that a lasting high has been struck. Rather, it most often indicates that the high struck is only corrective in nature. And, when that corrective high strikes a higher high, it most often portends that the chart still has much higher to go, even if we see more of a pullback in the coming months.

Now, since I believe that the action in the TLT will likely lead us to understanding what the Fed will ultimately do later this year, it would suggest that we could see the Fed lowering rates over the coming year. While many of you will present your theories as to “why,” I am not in the business of “why,” but simply in the business of making money by understanding the direction of the market based upon probabilities.

So, the probabilities still suggest that the market will attain at least the 128 region, but the route it will take to that region may become much more complex in the coming months. And, it may even offer another opportunity to those who did not board the last bull train to hop on board. But, this likely means that the Fed will be forced to lower rates later this year.

Housekeeping Matter

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Disclosure: I am/we are long TLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am quite close to stopping out and looking for a lower entry.