Bond Funds TLT and IEF Nearing Key Breakout

For those of you who closely watch bond and note prices, or perhaps trade them through respective ETFs, you’ve probably noticed that two major bond/note funds are nearing or already have broken out of a clean resistance level.

Let’s take a look at the iShares 7-10 Year Note fund and the iShares 20+ Year Treasury fund.

First, the popular TLT:

The TLT bond fund is forming an ascending triangle pattern with a clean horizontal resistance level at $100.  A break above $100 could send the fund surging higher as investors seek safety from mounting global economic concerns.

Whether or not the fund does strongly break above the $100 level, you must observe that the recent move from $87 at the beginning of April – before the Stock Market peaked – to $100 in the course of almost three months is a spectacular move for bonds.

Today, the TLT broke to new highs beyond those created from the “Flash Crash” panic of May 6th in the stock market.

There have been two clear spikes in volume in May as investors purchased shares in TLT – however the recent swing to a new price high has not been confirmed with a similar spike up in volume.

If we do see a break above $100, watch to see if it is met with a corresponding surge in volume.  If so, you can expect that prices will likely carry further… and that break up in bonds will likely correspond with a break down in stocks.

Let’s also look at the medium term bond/note fund – the 7-10 year IEF:

I won’t go into as much detail as I did for the TLT chart as the structure is the same, however I did want to highlight one clear difference.

Instead of bumping up against the horizontal resistance level that has formed an ascending triangle at the $94 level, the shorter-term bond/note fund clearly broke above that level last week and maintains the breakout this week.

This should have stock market participants spooked, or at least paying closer attention to whether bonds hold their breakout – which could be quite bearish for stocks – or sink back down from the overhead resistance.

Why should we care about bond breakouts and their potential affect on stocks?

The bond market tends to have a slight lead on the stock market in many instances.

Pay close attention to the May 6th flash crash in stocks.  As I highlighted in my weekly Inter-market Report at the time, bond funds broke out of a falling overhead trendline and began gapping strongly higher on Tuesday, May 4th – two days prior to the Thursday May 6th “Flash Crash.”

You can see that on the charts above.  Pay attention to the huge surge candle in early May – that was the Flash Crash.  Look two days prior to that candle to the price breakout and gaps that immediately preceded the “Flash Crash.”

That shows a recent example of why it’s important to watch bonds and bond/note funds in conjunction with stocks.

With that in mind, let’s watch this development very closely.

Corey Rosenbloom, CMT
Afraid to Trade.com

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