Want Clues to Likely Stock Reversals? Watch TLT

Jul 16, 2010: 1:24 PM CST

I’ve been pointing out to members of the Weekly Intermarket report that just prior to major market downturns, we have seen either a breakout in the TLT (20+ Year Bond Fund) or a strengthening in the fund while the SPY held up, just before a sharp fall.

This is the third such instance in the last few months, the others being:

The TLT broke and gapped sharply higher on Tuesday, May 4th – 2 days prior to the “Flash Crash”

The TLT broke out again from key resistance during the June 22 market turn

And now, let’s look at the current “Pre-Crash” signal the TLT gave us in the last couple of days:

Look closely to see that the TLT ETF bottomed on June 13th when the SPY ETF hit the key $110 level.  Nothing unusual about that.

What WAS unusual was that TLT began to move clearly higher on July 14th while the SPY stagnated at the highs, forming a double-top pattern on massive negative market internal divergences, as I highlighted in the NASDAQ at the time.

We now see the expected sharp downside resolution the divergences forecast.

But we also got a warning from TLT as well.  So, on July 14th, the SPY was flat while TLT rose sharply higher.

The big clue came Thursday, when the TLT broke sharply higher as the SPY turned lower (expected) but rallied on BP and GS news into the close… but TLT held its gains.

Thus, the SPY and TLT being up after a TLT breakout was another ‘big caution’ signal of a potential market reversal.

And today?  Big market reversal.

We can never know exactly when the market will reverse, but we can look “under the hood” at situations that have been known to form prior to reversals, such as massive market internal divergences and breakouts in TLT or IEF (7-10 year note ETF).

I actually highlighted the TLT and ETF breakout from June that called the market reversal at the time in the post:

“Bond Funds IEF and TLT Nearing Key Breakout”

As a reference, here is the current chart of the TLT that showed a bounce higher off support as the stock market came into daily resistance:

Though IEF actually bounced right off the rising 20 day EMA, the TLT dipped one day under the $99 level, but came back very sharply as seen above on Wednesday, Thursday, and today.

Pullbacks to support in the bond ETFs, or breakouts (such as that which occurred at the START of May and end of June) are often key signals that the stock market is likely to turn lower – or at least that’s been the recent development lately.

Either way, it pays to watch the TLT, IEF, and other important bond funds (and bond prices themselves) in conjunction with market internal divergences and daily structure (overhead resistance, trend, etc) to anticipate potential stock market turns more accurately.

These are the kinds of insights I share with members either of the Idealized Trades daily or Intermarket Weekly membership services, which digs quite a bit deeper than I’m able to do on the public blog.

Corey Rosenbloom, CMT

2 Comments

2 Responses to “Want Clues to Likely Stock Reversals? Watch TLT”

  1. More Breakouts in Bond Funds TLT and IEF | Afraid to Trade.com Blog Says:

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

  2. Tprovan Says:

    With flating of the short end this should force people out of bonds into stocks but the market has to bottom 1st
    long end up market up
    short end down market up
    what do you think about this statment