Treasuries At Resistance (TLT Chart): Will the Trend Hold? ~ market folly

Friday, June 26, 2009

Treasuries At Resistance (TLT Chart): Will the Trend Hold?

Kevin has recently brought a great chart to our attention. He pulls up the TLT which is essentially the 20 year treasury in exchange traded fund form. While some could argue technical analysis on this vehicle is a moot point, we still think there are some interesting observations at it has held numerous trendlines in the past.

This time around, Kevin has targeted $95 as the line in the sand for TLT. And, we completely agree with that. If you look at past trends for treasuries/bonds, you'll see that they typically put in a seasonal low around May or June. We are obviously right in the midst of that. What makes this interesting is that TLT is currently bumping up against its downward trendline (the red line), possibly set to breakout to the upside. This scenario would yet again solidify the seasonal aspects bonds have exhibited in the past. This might seem like mumbo-jumbo to some people, but it's still interesting to at least highlight.

(click to enlarge)

Currently, TLT is facing double resistance: from the downward trendline and also from the previous low established back in early May (the green horizontal line). So, watch this current area as a pivot point for the next big move in treasuries/bonds. If resistance holds, you can get short. If it breaks resistance, then get long for a trade. Either way, this vehicle often represents the inverse of the equity markets. So, a breakout in treasuries (people flocking to 'safety') would obviously be bad news for equities.

We saw this phenomenon in a big way back in October/November of last year. While it is unlikely we'd see that violent of a decrease in equities (and subsequent rise in TLT share price) again, the fact that numerous people have been calling for more downside is a cause for concern. This suspicion could possibly be confirmed if treasuries breakout to the upside. At the very least, it's an interesting indicator to monitor.

For additional thoughts regarding treasuries, make sure to check out hedge fund legend Julian Robertson's steepener swap play. That bet has sparked a lot of conversation in the debate as to which direction treasury yield curves are headed. Julian argues that they are headed 'steeper', while many others argue 'flatter' in a reversion to the mean trade. And, this is obviously very relevant because if TLT breaks out to the upside as hypothesized above, that would indicate the yield on the 20 year Treasury falling. (Remember, bonds have an inverse relationship between price and yield). Those betting on inflation and yields rising (by shorting TLT) have certainly had their way since the start of 2009; yields have risen and TLT has plummeted. Now it's time to see if the trend holds or not.

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