Note: This was published for my members over the past weekend.
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, I am looking to what TLT is telling me in order to glean a direction for interest rates.
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 TLT dropped just below 113. Our initial expectation was for a rally to the 124 region, followed by a pullback, and we 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 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 given 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.
With the action we have seen over the past few weeks, the market is now presenting us with a lesser likely scenario based upon our Elliott Wave perspective. (But that lesser likely scenario will offer us another opportunity.)
It does not often happen that a higher high is seen within a “corrective” structure. In Elliott Wave parlance, this occurs when a b-wave within an a-b-c corrective structure strikes a higher high than the last rally within the corrective structure. Many even call them false breakouts. And I think we may have seen that in TLT.
In fact, if the market continues with this structure in TLT, it can point us back down to the 116-118 region in the fund again. And, yes, I may view that as another gift to buy for a long trade in the fund. While I am not certain yet about where I would want to enter the market again, I am going to allow the market structure to dictate where I should buy TLT, just as it did at 113 and 119 in my last two trades higher.
But, make no mistake about it. The structure I am seeing in TLT still suggests that we can attain at least the 128 region, with the potential to even see the 131-136 region over the coming year. The manner in which the market provides us our next set-up will likely tell that story.
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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 have sold all my options, and only retain a 1/3 core position in TLT shares which was initially bought at just below 113.