Bond Fund at Critical Support Level

01/12/2010 12:01 am EST

Focus: ETFS

Corey Rosenbloom

Founder and President, Afraid to Trade

There is a critical support level here on the 20+ Treasury Bond Fund (TLT), as seen on both the weekly and daily chart.

Let’s take a quick look at this level and what could happen if support holds…or fails.

chart
Click to Enlarge

The weekly chart shows us that the 61.8% Fibonacci retracement of the 2006 low to the 2008 high is $88.88, which was near the recent low in price this week ($88.76).

Not only is this level important from a Fibonacci point of view, but this level has been a lengthy horizontal line, serving as both resistance (2008) and support (late 2008 and 2009). Thus, the market participants hold this as a significant level to watch.

Any support bounce off this level could send bond prices rallying to the $92 level, though any break of support would likely set up a quick short sell to test prior support at the $86 level (200-week SMA and the 2009 price low).

Any move under $85 in TLT would imply a full trend reversal that could take price back to prior support from 2007 at $75—which would imply that stock prices would continue their strong rally.

Let’s drop down to the daily chart to take a closer look at this $89.00 support level.

chart
Click to Enlarge

We see that $89 is an important support zone that bond buyers want to hold—and sellers want to break.

A break of $89 likely sends price down to test the $86 low from June 2009, and a break beneath that would be a significant development.

I’m also showing a potential head and shoulders pattern that began in September and carries forward to today, with two ways to interpret the neckline.

If you place the neckline at the $92 level of a smaller head and shoulders pattern, then the lower target becomes $85 (with a $7 distance from head to neckline, and $7 minus $92), which also serves to test the confluence support level there as mentioned on the weekly chart.

Otherwise, if you view this as a potential larger head and shoulders pattern beginning in July, then the neckline is the $89 support level and distance from head to neckline is $10, so if you subtract $10 from the neckline price at $89, then the lower target is $79.

Either way, no matter your bias for bonds, the $89 level will be important to watch for those trading ETFs and monitoring bond prices in general.

By Corey Rosenbloom of AfraidToTrade.com

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