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See you tonight!
The last 3.5 years have been brutal for investors in the iShares 20 Plus Year Treasury Bond ETF (TLT).
TLT invests in long-term U.S. Treasury Bonds (20 years and longer). And it has fallen around 54% since its March 2020 high… and over 20% just since May.
That’s a huge hit for an asset class that is supposed to help reduce volatility in an investment portfolio.
The Fed’s confirmation last month that interest rates would stay “higher for longer” compounded TLT’s recent fall. (That’s because existing bonds drop in value when new bonds are issued with higher yields.)
But with the news so bearish, today I want to see what’s in store from here…
A Steep Sell-Off
TLT rallied at the start of this year.
And after its massive downtrend, the 50-day moving average (MA, blue line) swung upward in February before tracking sideways through May:
iShares 20 Plus Year Treasury Bond ETF (TLT)
Source: eSignal
Through that sideways period, the 10-day MA (red line) crossed the 50-day MA multiple times in both directions.
However, from May onward, the downward angle of the 50-day MA kept getting steeper as TLT’s next down leg got underway.
As the chart shows, this coincided with two other bearish signals…
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The 10-day MA crossed and stayed below the 50-day MA. Both MAs trended lower.
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The relative strength index (RSI) crisscrossed the support/resistance level (green line) and fell into its lower range, where it has remained for the rest of TLT’s sell-off.
But despite TLT’s sharp fall, it hasn’t been all one-way traffic down…
Take another look:
iShares 20 Plus Year Treasury Bond ETF (TLT)
Source: eSignal
In both May and July, TLT briefly counter-rallied when the RSI formed a “V” and rallied back up to resistance.
And in August, TLT bounced… While the stock price was falling (upper left orange line), the RSI was climbing from oversold territory (lower left orange line)…
When momentum is building like this, it will eventually cause a stock to rally – even in a downtrend.
And there’s a similar pattern developing right now.
The RSI and TLT stock price are converging again (right orange lines). So what am I looking for next?
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Stay Nimble
The RSI is making higher lows.
And what happens next will be key.
If the RSI keeps making higher lows, that could set TLT up for a potential short-term bounce and provide the opportunity for a potential long trade.
But after such a strong sell-off, we’d need to be particularly nimble with any trade. (And remember, there are no guarantees.)
If we catch a bounce, we would aim to exit the trade as soon as the RSI pushes up against resistance (green line), since that is where previous bounces have petered out.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Mailbag
How do you think the Fed’s “higher for longer” narrative will impact the bond market going forward? Let us know at [email protected].