Critical Support Level for TLT Bond Fund Jan 10

Jan 10, 2010: 2:41 PM CST

There is a critical support level here on the 20+ Treasury Bond Fund – symbol TLT – as seen on both the weekly and daily chart.

Let’s take a quick look at this level, and what could happen if support holds… or fails.

The weekly chart shows us that the 61.8% Fibonacci retracement of the 2006 low to the 2008 high is $88.88 – which was the near the recent low in price this week ($88.76).

Not only is this level important from a “Fibonacci” point of view, but this level has been a lengthy horizontal line, serving as both resistance (2008) and support (late 2008 and 2009) – thus the market participants hold this as a significant level to watch.

Any support bounce off this level could send bond prices rallying to the $92 level, though any break of support would likely set-up a quick short-sell to test prior support at the $86 level (200 week SMA and the 2009 price low).

Any move under $85 in the TLT would imply a full trend reversal that could take price back to prior support from 2007 at $75… which would imply that stock prices would continue their strong rally.

Let’s drop down to the daily chart to take a closer look at this $89.00 support level.

We see that $89 is an important support zone that bond buyers want to hold… and sellers want to break.

A break of $89 likely sends price down to test the $86 low from June 2009, and a break beneath that would be a significant development.

I’m also showing a potential head and shoulders pattern that began in September and carries forward to today, with two ways to interpret the neckline.

If you place the neckline at the $92 level of a smaller H&S pattern, then the lower target becomes $85 (with a $7 distance from head to neckline, and $7 minus $92) which also serves to test the confluence support level there as mentioned on the weekly chart.

Otherwise, if you view this as a potential larger head and shoulders pattern beginning in July, then the neckline is the $89 support level and distance from head to neckline is $10, so if you subtract $10 from the neckline price at $89, then the lower target is $79.

Either way – no matter your bias for bonds – the $89 level will be important to watch for those trading ETFs and monitoring bond prices in general.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

5 Comments

5 Responses to “Critical Support Level for TLT Bond Fund Jan 10”

  1. bull_flag Says:

    Corey could you elaborate more on the link between the bonds to the stock market?

    spy:tlt

    Thanks

  2. Corey Rosenbloom, CMT Says:

    Good question!

    In general, bonds and stocks compete for investor assets, where stocks represent 'risk and return' and bonds represent 'safety and income.' The relationship is not that simple of course, and in recent history, these markets have been inversely correlated (though not always the case of course).

    Bonds are more sensitive to inflation (bonds decline if inflationary concerns are forefront) while stocks might benefit from inflation (commodities are positively correlated with stocks right now).

    Take a weekly or perhaps monthly look at $SPX and $UST in StockCharts or as you mentioned SPY and TLT to get a sense of the relationship in price.

  3. bull_flag Says:

    Thanks Corey

    This is a very good topic for future blog posts.. 🙂

  4. DaveinHackensack Says:

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