Bond Funds TLT and IEF Nearing Key Breakout

Jun 28, 2010: 2:32 PM CST

For those of you who closely watch bond and note prices, or perhaps trade them through respective ETFs, you’ve probably noticed that two major bond/note funds are nearing or already have broken out of a clean resistance level.

Let’s take a look at the iShares 7-10 Year Note fund and the iShares 20+ Year Treasury fund.

First, the popular TLT:

The TLT bond fund is forming an ascending triangle pattern with a clean horizontal resistance level at $100.  A break above $100 could send the fund surging higher as investors seek safety from mounting global economic concerns.

Whether or not the fund does strongly break above the $100 level, you must observe that the recent move from $87 at the beginning of April – before the Stock Market peaked – to $100 in the course of almost three months is a spectacular move for bonds.

Today, the TLT broke to new highs beyond those created from the “Flash Crash” panic of May 6th in the stock market.

There have been two clear spikes in volume in May as investors purchased shares in TLT – however the recent swing to a new price high has not been confirmed with a similar spike up in volume.

If we do see a break above $100, watch to see if it is met with a corresponding surge in volume.  If so, you can expect that prices will likely carry further… and that break up in bonds will likely correspond with a break down in stocks.

Let’s also look at the medium term bond/note fund – the 7-10 year IEF:

I won’t go into as much detail as I did for the TLT chart as the structure is the same, however I did want to highlight one clear difference.

Instead of bumping up against the horizontal resistance level that has formed an ascending triangle at the $94 level, the shorter-term bond/note fund clearly broke above that level last week and maintains the breakout this week.

This should have stock market participants spooked, or at least paying closer attention to whether bonds hold their breakout – which could be quite bearish for stocks – or sink back down from the overhead resistance.

Why should we care about bond breakouts and their potential affect on stocks?

The bond market tends to have a slight lead on the stock market in many instances.

Pay close attention to the May 6th flash crash in stocks.  As I highlighted in my weekly Inter-market Report at the time, bond funds broke out of a falling overhead trendline and began gapping strongly higher on Tuesday, May 4th – two days prior to the Thursday May 6th “Flash Crash.”

You can see that on the charts above.  Pay attention to the huge surge candle in early May – that was the Flash Crash.  Look two days prior to that candle to the price breakout and gaps that immediately preceded the “Flash Crash.”

That shows a recent example of why it’s important to watch bonds and bond/note funds in conjunction with stocks.

With that in mind, let’s watch this development very closely.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

10 Comments

10 Responses to “Bond Funds TLT and IEF Nearing Key Breakout”

  1. terlyn Says:

    I'm looking at a possible bear market ascending triangle in SPY. Please let me know if you agree.

  2. banco Says:

    CURRENT MARKET DRIVERS: The most significant aspect of current trade continues to be the drop in yields in the US bond market and the weekly chart of the 10 year US treasury has broken ahead of a crucial support area and in the process it has reversed the one year moving average on yields indicating that the risk aversion trade continues to play a dominant role in the market. The performance in this regard suggests that a circumspect approach continues to be appropriate. Commodities and industrial metals have enjoyed a degree of support over the past few days trading up from a sharply oversold position and, over the next six to eight trading days, this improved performance requires confirmation if additional momentum is to materialise. The green back has lost some momentum but it continues to trade ahead of an important support area by a small margin and only a break beyond 1.2520 would clearly indicate a near term reversal in trend.

    Hi Corey
    The above comment is that of my broker here in South Africa.
    Can you give us yourviews on the 10Year T-Bill and maybe do some technical analysis on it.

  3. MadScientist Says:

    China just crashed.
    Dollar is going UUP.
    SPY is going down…

    And I reversed my bearish positions to bull on yesterday…. should have done a straddle (but with stocks/etfs).

  4. Corey Rosenbloom, CMT Says:

    I think you are right! Harsh breakdown in stocks this morning confirms the triangle break – and it was a continuation pattern.

  5. Corey Rosenbloom, CMT Says:

    Oh no – I'm sorry to hear that.

    We certainly could have bounced off 1,070 in stocks, but bonds gave us an early warning as I posted yesterday.

    Bonds broke out yesterday and today the market crashed.

  6. Surveying the Tuesday Selloff with Maps and Facts | Afraid to Trade.com Blog Says:

    […] highlighted a breakout in bond prices on Monday – once again, just like the May 6th “Flash Crash,” the signal from bonds in the […]

  7. Trade2win Says:

    Nice work Cory

  8. Want Clues to Likely Stock Reversals? Watch TLT | Afraid to Trade.com Blog Says:

    […] “Bond Funds IEF and TLT Nearing Key Breakout” […]

  9. File Cabinet Lock Bar Says:

    Please give me more information. I love it, Thanks again.

  10. Update on Surging Bond Funds TLT and IEF | Afraid to Trade.com Blog Says:

    […] written on how key breakouts above resistance in TLT and IEF forecast something ‘big’ negative brewing in the equity markets, and two days after the […]