Charting the Breakout and Current Levels to Watch in Bond Funds TLT and IEF

Aug 27, 2011: 11:57 AM CST

You’re probably aware of the large price breakout in defensive bond ETFs TLT (20+ year) and IEF (7 – 10 year), but it’s always worth reviewing along with current price levels to watch for support or a reversal signal.

Let’s start with the daily chart of the popular TLT fund:

Investors can turn to TLT when they want to take off some stock market risk, or desire to play for a bullish move in a traditionally defensive market.  Short-term traders can of course use these ETFs as any trading vehicle.

Price-wise, TLT formed a clear overhead resistance level at $97 per share which corresponded with the all-important 1,260 price support in the S&P 500.

When stocks sharply broke their critical support level, bonds subsequently broke their key resistance level – setting up a cross-market trading opportunity.

What resulted was a strong, impulsive move higher in bond prices (and bond ETFs) which took price to levels not seen since the heart of the financial crisis of 2008.

The breakout was confirmed with surging volume which took us to $112 on the TLT chart above.

From a chart standpoint, the most recent push into $112 was met with a negative volume and momentum divergence which is a caution signal to late-buyers of these funds – typically it’s not a good idea to get long into an overextended rally that’s forming negative divergences.

Still, the key daily chart level to watch is the rising 20d EMA potential support at $106… which was this week’s low.

Let’s now turn to the shorter-term IEF fund (which is similar to the 10-Year Treasury Note price) and then step inside the chart to the hourly vantage point:

The commentary/chart in IEF is very similar to that of TLT so there’s no major surprises.

Volume confirmed the move in an “Accumulation” phase from March 2011 until present, where volume is failing to confirm the recent push to new highs into $104.

Like TLT, the 20 day EMA comes into play as a support level to watch at $102 in the IEF.  A failure to hold these 20d EMAs will be a short-term reversal signal.

Speaking of short-term reversal signals, let’s step inside the hourly chart for additional insights:

You can pick-up more information by looking at the hourly or 30-min charts, especially in volatile markets like these.

We saw persistent confirmation in both momentum (3/10 oscillator) and volume all the way up during the first half of August, though the remaining half is showing clear negative divergences – non-confirmations – in both volume and momentum.

This week, we also observed a short-term (intraday) sell-signal on the breakdown of rising trendlines and the rising 50 period EMA on the hourly frame.

That sets up a major caution signal (an early exit signal) and puts the focus squarely on the $102 level which is our daily chart EMA support.  A breakdown under $102 will likely be treated as a wider sell signal.

Otherwise, persistent trends have a stubborn tendency to overcome divergences, so these divergences/non-confirmations will be invalidated should buyers step back in and drive prices to new highs above $104.50 in IEF and $104.50 in TLT.

For now, keep focused on these respective levels in the context of an intraday deterioration of volume and momentum.

Corey Rosenbloom, CMT
Afraid to

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2 Responses to “Charting the Breakout and Current Levels to Watch in Bond Funds TLT and IEF”

  1. Sunday links: psychological weaknesses | Abnormal Returns Says:

    […] Corporate bonds are lagging Treasuries.  (Afraid to Trade) […]

  2. Novatos Trading Club Says:

    More than ever, taking into account bond and equities relationships is a key factor to position ourselves “on the right side”.

    Corey, could you elaborate on yield curve, and bond-stocks direct/inverse correlations, please?