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Where are Bonds Headed Next?

Sep 28, 2012
Chad Karnes, CMT

The Fed has laid all its cards on the table, yet Treasury rates are higher today than they were last year. Long term bonds have been a great investment for decades, but have recently shown signs of weakness. Has a trend change arrived?

One tried and true investment theme over the last year, last decade, and the last three decades is that bonds have been the place to put your money instead of stocks.  Recently, a short term top in bond prices has played out and yields have started to rise. Is this the major trend change everyone is waiting for? 

We have been bullish on bonds seemingly forever and now there is at least a little reason to be cautious.

Perma-Bulls?

We have been bullish on bonds for awhile now.  In December 2011 with the backdrop of the Federal Reserve’s Operation Twist announcement and despite supposed experts talking up the end of bonds, the ETF Profit Strategy Newsletter was bullish and stated:

“Perhaps no investment category more than U.S. Treasuries – particularly long-term Treasuries – has confounded Wall Street’s leading voices over the past year. PIMCO’s Bill Gross (NYSEARCA:BOND) , one of the brightest minds in the fixed income space, was dead wrong about Treasury prices collapsing.  And so were all of the other talking heads who predicted the mid-year deficit ceiling crisis would spell doom. Long-term Treasuries (CHICAGOOPTIONS:^TYX) still have more upside.” 

In an article published on February 23 entitled “Look who hates US Treasuries” we again reiterated our position that bonds were the place to be as sentiment continued in the dumps (and giving a contrarian buy signal). 

More recently on 7/1 with price at $125.20 the ETF Profit Strategy Update posted the below chart with the commentary, “The iShares Barclays 20+ Yr Treasury ETF (NYSEARCA:TLT) has been going gangbusters for years now, and there is no reason to expect any change at this point.  Continue to disregard the media and talking heads that say bonds are overvalued and inflation is around the corner.  Until we see it in price, it is not happening.”

 

Protecting Profits

Three weeks later on 7/23 after a $5.50 gain, the TLT broke above its all time high at $130 and we advised our subscribers, “Price action today gives us a great opportunity to move our stops just below $130 for aggressive traders.  After a breakout which likely will be confirmed this week, any fall back below $130 could set up a topping pattern.”  The below chart accompanied that update:

 

On 7/27 when prices opened at $129.89, profits were locked in.  Since then the TLT price has fallen rather sharply finding support at our intermediate trendline around $121 that had been in place for months (in blue in the above chart). This quick trade generated over $4 of TLT price gain in under a month and got aggressive traders out near the top protecting their profits over the last two months.

Long Term Treasury Outlook

At $124 the TLT is still well below its $132 all time high price.  It now trades in a very important downtrend channel and has recently run into overhead resistance.  If bonds can overcome this resistance, they likely will resume their bullish advance to new highs. 

However, caution must reign supreme for shorter term investors as major support still exists at $121 and the short term trend is still down.  If the TLT fails to hold price above that and one other key level, the bond market's downtrend will likely pick up steam.  The coming month in bonds is extremely important to its shorter term trend.

If a breakdown occurs aggressive traders may want to look into the ProShares UltraShort 20+ Year Treasury (NYSEARCA: TBT) to take advantage of the levered short side, or more conservative investors may want to shorten their bond duration by switching into the iShares Barclays 7-10 Year Treasury (NYSEARCA:IEF) or look into hedging with the ProShares Short 20+ Year Treasury (NYSEARCA:TBF).

The ETF Profit Strategy Newsletter highlights important support, resistance, and target levels with actionable ETF strategies that help investors and traders stay ahead of potentially major trend changes.  Updates on long term bonds as well as other asset classes are provided a few times each week in our Technical Forecast.

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