More Breakouts in Bond Funds TLT and IEF

Aug 16, 2010: 11:29 AM CST

I feel like I’m beating the same drum, but Treasury bond funds TLT (20+ year) and IEF (7-10 year) continue to breakout to fresh 2010 highs – and this morning gave us another sharp gap up to new highs.

Let’s take a look first at the longer-term fund TLT:

This post just shows the specific breakouts, but look closely at the three recent clean price breakouts from overhead resistance.

First, we had the TLT stagnate between $91 and $87 for the early part of 2010 and then break with sharp gaps up as May began.

I know what you’re thinking – you say price broke out because of the Flash Crash (investors panic) but look extra close – price broke out BEFORE the Flash Crash which took place on May 6th – it’s that really big bar that goes from $93 to $99 in one day.  THAT was the Flash Crash.

Notice the price breakout and two gap-up days in a row BEFORE the crash.  The bond market often has a slight lead on the Stock Market.

See my prior post:

Want Clues to a Likely Stock Market Reversal?  Watch TLT and IEF

Or another prior post:

Bond Funds IEF and TLT Nearing Key Breakout” (which they did)

Price broke out above resistance again in late June, but abruptly turned around when the stock market bottomed in early July.

Now, we have another key breakout above clear price resistance at $102 – so it’s if anything a caution signal for the stock market  – not necessarily forecasting a crash of course, but certainly signaling caution.

Let’s see the same progression on the shorter-term fund IEF:

Though I didn’t specifically label it, price broke out of overhead resistance at $89.50 in late April and off to new highs in early May – gapping up two days prior to the infamous May 6th “Flash Crash” – the same as TLT.

Bonds snapped lower during the ‘snap-back’ rally in stocks and then continued higher as the stock market continued lower.

IEF broke out again in mid-June which coincided with the short-term market peak (the first time) at 1,130 on June 21 – no lead time there.

Recently, the IEF broke out of the resistance at $96 in early August prior to the second retest and failure of the stock market at 1,130 which (short-term) peaked on August 9th.

The IEF fund broke out with a gap move as seen here on August 6th – three days prior to the stock market peak and downturn (which actually began officially with a sharp sell-off day on August 11th).

And today, we see a continuation of the break and another gap higher.

What’s the main idea?

Sometimes – not always of course – bond funds will break resistance ahead of short-term peaks in the stock market.

We are seeing strength in the bond market and weakness in the stock market.

As long as this continues to be the case, traders should be aware that the stock market would likely continue to be weak going forward and to use caution in your trading decisions.

And the flipside – any sudden deterioration in the bond market would be likely bullish short-term for stocks.

Keep watching this situation closely.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

3 Comments

3 Responses to “More Breakouts in Bond Funds TLT and IEF”

  1. steveo77 Says:

    If this is just a flight to safety, ahead of say bombing Iran, then why would people buy the 20 year….why not 6 months or 1 year as a place to just park some money till the smoke clears?

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