New Bond-Buying Binge Ahead?

12/20/2011 11:48 am EST

Focus: BONDS

Thomas Aspray

, Professional Trader & Analyst

Various signals are predicting higher bond prices ahead, a development that is likely to spur a renewed flow of assets into the bond market and a move away from riskier high-yield stocks.

The weakening in the stock market internal indicators like the Advance/Decline (A/D) line continued on Monday, and stocks now need to rally impressively (and soon) to avert a more serious decline.

The recent action in the interest rate market is suggesting that we may see another decline in yields, as bond prices once again move higher. This suggests that risk-averse investors may again be ready to jump back in the bond market.

The completion of the triangle formation in the iShares Barclays 20+ Year Treasury Bond ETF (TLT) projects higher price targets for the popular bond ETF, which I recommended buying on December 9.

A move into lower-risk Treasury instruments is also likely to hurt some of the highly touted, super-high-yield stocks.

Click to Enlarge

Chart Analysis: The chart of the CBOE Interest Rate Ten-Year T-Note Index has a long-term downtrend going back to the 1990s that is now at 4.4%.

  • The daily chart shows that the downtrend from July (line a) was tested in December before yields turned lower
  • Long-term resistance, line d, was previous support going back to 2010, and this emphasizes the importance of looking at long-term charts. The resistance level is now just above 2.5%
  • The completion of the recent continuation pattern, lines c and d, has downside Fibonacci targets now at 1.5%
  • Yields now have key short-term resistance at 2.16%

NEXT: Completed Chart Pattern in Major T-Bond ETF


Click to Enlarge

The iShares Barclays 20+ Year Treasury Bond ETF (TLT) completed its flag triangle formation, lines a and b, with Monday’s close. The next resistance is at the October highs at $125.03.

  • The Fibonacci target from the flag formation is at $129.60, while the chart formation targets are much higher (see “Using Fibonacci to Trade Flag Patterns”)
  • The relative performance, or RS analysis, has just broken its downtrend. A move above the previous highs will indicate that TLT is clearly outperforming the Sypder Trust (SPY)
  • Daily on-balance volume (OBV) has just moved through its downtrend, though volume so far has not been that heavy. Look for a 20-million-share day (or more) to confirm the breakout
  • Weekly OBV (not shown) is still below its rising weighted moving average (WMA)
  • TLT dropped as low as $116.63 on August 9 and now has short-term support at $122.50 with further support at $120.50

Annaly Capital Management Inc. (NLY) is a $14 billion diversified REIT that currently yields is 14.7%. When I first warned about the risks in NLY, it was trading at $17.86 and yielding 14%.

  • The rebound from the October low at $14.65 has traced out a bear flag formation, lines g and h. The recent rally has not been impressive
  • There is first support at $16, and a convincing break of support at line h will give  Fibonacci retracement targets in the $14.00 area
  • The OBV has stayed flat for the past few months, suggesting that there has been little accumulation
  • Weekly OBV (not shown) is also negative

What It Means: After the recent action in the interest rate market, I would expect to see one to two days of consolidation before Monday’s extremes are overcome. TLT could pull back for a day or two, which makes the weekly close quite important. A close above $124 would be quite positive.

How to Profit: Previous buyers should be long the iShares Barclays 20+ Year Treasury Bond ETF (TLT) at $117.42 or better and using a stop now at $116.34. Conservative investors should go 50% long at $123.62 and 50% long at $121.76 with a stop at $118.48.

For anyone who is still stubbornly long Annaly Capital Management Inc. (NLY), please have stops in place. Alternatively, you could hedge the position by selling a call against your existing long stock position. The options are not very liquid, so be sure to use limit orders.

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