Updating the Breakdown in Bond Funds TLT and IEF

Oct 30, 2011: 1:19 PM CST

If you’re looking at the Stock Market only, you’re likely missing the other side of the coin which is the Bond Market.

With the recent surge through resistance in stocks, let’s get a check-up on the break under support in popular bond funds TLT and IEF.

First, the 20+ Year TLT:

Let’s start with the basics and move from there.

Bonds surged, breaking overhead resistance in August at the same time stocks ‘collapsed,’ and Bonds reached targets beyond what many traders thought was possible.

After such a strong rally, odds favor a retracement (at best) or even reversal of trend, which was confirmed by the negative dual divergences in both volume and momentum (the picture is clearer in IEF below).

The TLT fund peaked at $125 and has been heading lower in conjunction with a “bottomed” stock market rocketing higher and higher.

The first sell signal came on the break of the rising 20d EMA at $117.50, and the second signal triggered Thursday with a breakdown and close under the rising 50d EMA and 38.2% “short-term” Fibonacci grid.

That puts bonds on a downward path to test lower support levels, including the Fibonacci confluence here at $110 (‘bigger’ 38.2% level), and if this confluence target fails here, we’d be looking to the middle confluence at $105.

Keep those levels in mind in the event we do continue to see lower and lower bond (fund) prices, which almost certainly will correspond with higher stock prices (particularly if the S&P 500 can close above 1,300).

As mentioned, the picture is similar in the 7 to 10 year IEF Fund:

I believe the negative divergence show up clearer on the IEF fund, but you be the judge.

It’s a lesson on how divergences undercut (fail to confirm) new price highs, putting traders on the defensive (taking profits) or short-selling in anticipation of a potential reversal (aggressive strategy).

Similarly, the first “confirmed” sell signal came on the break of the rising 20d EMA at $104 which was followed up immediately with a break/close under the 50 EMA (ahead of the TLT).

Thursday gave us a fresh sell signal in the form of the breakdown under horizontal trendline support (price) and the 38.2% Fibonacci line as drawn.

Longer-term, $97 is a reasonable confluence target (price and the 200d SMA) if stocks continue their upward bounce (and of course, bonds continue their downward swing).

Continue watching these levels in conjunction with what’s happening in the Stock Market.

Corey Rosenbloom, CMT
Afraid to Trade.com

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