A string of weakening economic data has many investors pondering the “r” word… recession.
Just last week, manufacturing data showed shrinking activity for the fifth consecutive month.
Then job openings fell to the lowest level in over three years and missed economist estimates.
Finally, the payrolls report for August showed that 142,000 jobs were created for the month. That missed expectations of 161,000.
Reasons like these could explain why the S&P 500 is down 3% to start September.
But it’s not all bad news…
The recent weak data has driven a rally in one corner of the market where I’ve already been making profitable trades…
The $27 Trillion Treasury Market
U.S. Treasury securities make up a $27 trillion market. And traders who are paying attention can find some strong setups in this arena right now…
Let me explain some of the dynamics…
Yields on Treasury securities like bonds move inversely to their price.
So when prices rise, yields fall – and vice versa.
That’s because most bonds pay a fixed interest rate. Existing bonds become more attractive when interest rates fall. That increases demand and their prices.
On the other hand, if interest rates rise, existing bonds paying out a lower rate don’t draw much attention. As such, their prices fall to make them more attractive.
And these assets often feel the impact of economic news like inflation. A booming economy tends to push yields higher (and prices lower).
Likewise, bond prices often rally in response to a dicey economic outlook (as yields suffer).
At present, inflation has recently headed lower… and signs of a weaker economy are emerging.
As a result, bond prices have started to rally.
And that’s brought longer-dated bonds back to a key resistance level that you should be watching…
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Watch for a Break in Bonds
The iShares 20+ Year Treasury Bond ETF (TLT) tracks Treasurys with a remaining maturity of 20 years or longer.
I like TLT when it comes to trading bonds. Because when there’s a change in interest rates, longer-dated bonds see a larger price change than short-term bonds.
With that in mind, let’s take a look at the TLT chart below.
TLT fell to near all-time lows last October at “1.”
But TLT is recovering off that level and has been making a chart pattern called an ascending triangle.
An ascending triangle displays higher lows – along with a resistance level that’s tested several times.
I’m highlighting that pattern with the dashed trend lines in the chart.
In my Opportunistic Trader advisory, we traded TLT options in August during this pattern. We saw gains of 34.5% and 15% trading both calls and puts.
But the thing to watch now is how TLT handles the resistance level at $100 (the upper dashed line in the pattern).
The Relative Strength Index (RSI) recently crossed back above 50.
Yet it’s pushing near overbought territory (see the arrow) just as TLT is testing resistance at “2.”
So yes, weak economic data is helping drive a rally in bonds…
But I wouldn’t be surprised to see TLT turn lower at the $100 level again as momentum stretches to the upside.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict