Charting a Potential Break in Bond Fund IEF and TLT

Jan 20, 2012: 4:39 PM CST

Following up with my prior inter-market post this week “Something’s Gotta Give,” let’s take a look at the sharp down-move that developed since then as seen in bond funds IEF and TLT.

Let’s start with the 7 to 10-year Treasury Fund IEF:

Quick analysis shows us a lengthy (mature) uptrend that is undercut by lengthy negative divergences in both volume and momentum – not something you want to see if you’re bullish on bond prices.

There’s also a mini-Triple Top pattern (and internal divergences) into the critical $106 overhead resistance.

In short, that’s bearish for bond prices as it stands at this moment.

This week saw a sharp three-day reversal lower which now threatens to break the rising 50 day EMA at $104.50.

Let’s turn now to the similar landscape in the more popular (known) 20+ Treasury fund TLT:

We see a similar mature uptrend undercut by lengthy negative divergences into the key $122.50 overhead resistance level.

This is a closer look at what I was describing in the “Something’s Gotta Give” post:

Either “Risk-Off” assets such as bonds reverse lower from resistance, which suggests “Risk-On” assets like stocks break higher, or vice versa.

As of the last few days, the structure has tipped in favor of “Risk Off” assets beginning an early potential reversal, though we’ll need to see price break firmly under their respective rising daily trendlines and 50d EMAs where they stand now.

In other words, while we still could see a bounce higher in bond prices off the 50d EMA (reference early November 2011), further downside price action suggests a high probability for the “Risk-Off” Asset Reversal lower and “Risk-On” Asset Continuation higher thesis.

Though I don’t show it in a separate chart, the S&P 500 broke tentatively above 1,300 and closed the week at 1,320 on a seemingly hesitant (not compellingly impulsive) breakthrough.

The Dow Jones almost completed a full retest of its 2011 high which will be a critical ‘price resistance’ area to watch closely.

For a longer perspective on bond funds, let’s view the monthly structure for IEF:

A quick price-based look shows us a lengthy, overextended rally scraping above the upper Bollinger (volatility) Band near $105.

We can see historically how two similar overextended rallies ended – with a clean retracement back to the rising 20 month EMA (which was a buying opportunity).

So unless the structure changes dramatically with a sudden upsurge in bond prices – and yes that could happen – the simple chart-based odds seem to favor weakness for bond prices, particularly on a trigger under the daily chart trendlines and EMAs shown above.

Watch closely to see if indeed this outcome develops.

Corey Rosenbloom, CMT
Afraid to Trade.com

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4 Comments

4 Responses to “Charting a Potential Break in Bond Fund IEF and TLT”

  1. Mywealthyoptions Says:

    Great Analysis. DOW closed at 12720 and should face resistance at 12750. I am expecting a stiff resistance around 12750. What do you think?

    http://mywealthyoptions.blogsp

  2. Sunday links: a skill shortage | Abnormal Returns Says:

    […] bond ETFs look like they are rolling over.  (Afraid to Trade also Sober […]

  3. Kirk Nathaniel - Option Alpha Says:

    I've tried to trade the TBT long for a year now (inverse of the TLT) so if you can catch it here Corey on the way down then more power to you!

  4. A Rounded Reversal and Support Level to Watch in Bond Fund TLT | Afraid to Trade.com Blog Says:

    […] you can see how the lengthy negative divergences developed during the agonizing flat or “consolidation” period from November 2011 to present which culminated in this week’s strong support […]