Target Hit at Key Inflection Point for Bond Funds TLT and IEF

May 29, 2013: 9:44 AM CST

The renewed focus on the potential for higher future interest rates led bond funds TLT and IEF to achieve a downside price support target quickly.

Let’s take a look at this target which is the current key inflection level for traders to watch closely – with updated targets depending on what happens here.

We’ll start with the Weekly View of the 20+ year fund TLT:

We’ll simplify the chart by focusing on the critical inflection level into the $115 per share horizontal price and 38.2% Fibonacci Retracement level.

After the bear trap or false breakout event in April, the return back under the falling trendline allowed for an expected play back to the prior low in a continuation of the short-term downtrend.

This is another recent example of the concept of failed trades forecasting a bigger move in the opposite direction.

All things being equal, the key focal point here is whether the fund can attract buyers at a critical support level or whether sellers will continue to dominate the short-term downtrend, thus extending the next lower support target to the prior low and 50% Fibonacci Retracement near $110 per share.

We can see the immediate structure on the Daily Chart clearer:

The declining parallel trendline channel has developed nicely from July 2012 to present and again the fund interacts with the higher frame $115 per share level along with the $114 per share level just above the declining trendline support.

Note again the bull trap or failed breakout that reversed on a divergence into $124 per share – that failure helped signal the likelihood that a return to the prior low and falling trendline was the expected play.

Note how volume has been increasing steadily throughout 2013, particularly with respect to the prior two swings (from $114 to $124 and now back to $114).

The price action and planning is similar in the 7 to 10 year fund IEF (starting with the Weekly Chart):

While the patterns are roughly the same, the price levels are different.  The focal point for IEF remains the $105 per share level which is a full retest of the falling trendline of the weekly declining channel pattern along with the lower Bollinger Band intersecting $104.91.

The Daily Chart again reveals more details about short-term trading and game planning:

After a similar bull trap in early April into $109 per share, the price reacted lower to continue the short-term downtrend, ending at the current key inflection point near the $105 easy-reference confluence.

While it would be expected to see a bounce/rally here, do guard against (or trade short) a breakdown under the current $105 key price and indicator confluence support target level.

A firm breakdown under $105 here – and it could easily occur – opens the fund to a breakdown opportunity which extends the next lower price support target back to $104 (the gap) then $102 per share (the early 2012 low).

Depending on what happens here, we could receive a clear message from the bond market regarding investor expectations.

A failure to hold or at least bounce higher off these target inflection levels suggests that the selling in the bond market will continue and perhaps accelerate, and this outcome would continue to push yields higher with a price breakdown.

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Corey Rosenbloom, CMT
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