2 Simple Bond ETF Trades

01/23/2012 12:20 pm EST

Focus: ETFs

Corey Rosenbloom

Founder and President, Afraid to Trade

Two popular Treasury bond ETFs are turning lower as predicted, and a break of nearby price and moving average support would likely clear the way for additional downside movement.

Following up with my prior intermarket article from last week (see “Intermarket Marvel Can’t Last…Can It?”, let’s take a look at the sharp down move that has since developed, as seen in bond funds including the iShares Barclays 7-10 Year Treasury Bond Fund (IEF) and iShares Barclays 20+ Year Treasury Bond Fund (TLT).

Let’s start with the seven- to ten-year Treasury fund IEF:

chart
Click to Enlarge

Quick analysis shows us a lengthy (mature) uptrend that is undercut by lengthy negative divergences in both volume and momentum—not something you want to see if you’re bullish on bond prices.

There’s also a mini triple-top pattern (and internal divergences) into the critical $106 overhead resistance.

In short, that’s bearish for bond prices as it stands at this moment.

This week saw a sharp three-day reversal lower, which now threatens to break the rising 50-day exponential moving average (EMA) at $104.50.

Let’s turn now to the similar landscape in the more popular (known) 20+ Treasury fund TLT:

chart
Click to Enlarge

We see a similar mature uptrend undercut by lengthy negative divergences into the key $122.50 overhead resistance level.

This is a closer look at what I was describing in last week’s article.

Either “risk-off” assets such as bonds reverse lower from resistance, which suggests “risk-on” assets like stocks break higher, or vice versa.

As of the last few days, the structure has tipped in favor of “risk off” assets beginning an early potential reversal, though we’ll need to see price break firmly under their respective rising daily trend lines and 50-day EMAs where they stand now.

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In other words, while we still could see a bounce higher in bond prices off the 50-day EMA (reference early November 2011), further downside price action suggests a high probability for the “risk-off” asset reversal lower and “risk-on” asset continuation higher thesis.

See related: “Risk-on” vs. “Risk-off” Trades

Though I don’t show it in a separate chart, the S&P 500 broke tentatively above 1,300 and closed the week at 1,320 on a seemingly hesitant (not compellingly impulsive) breakthrough.

The Dow Jones almost completed a full retest of its 2011 high, which will be a critical price resistance area to watch closely.

For a longer perspective on bond funds, let’s view the monthly structure for IEF:

chart
Click to Enlarge

A quick price-based look shows us a lengthy, overextended rally scraping above the upper Bollinger (volatility) band near $105.

We can see historically how two similar overextended rallies ended with a clean retracement back to the rising 20-month EMA (which was a buying opportunity).

So unless the structure changes dramatically with a sudden upsurge in bond prices—and yes, that could happen—the simple chart-based odds seem to favor weakness for bond prices, particularly on a trigger under the daily chart trend lines and EMAs shown above.

Watch closely to see if this outcome indeed develops.

By Corey Rosenbloom, CMT, trader and blogger, AfraidtoTrade.com

 Corey will also be a speaker at the upcoming New York Traders Expo.

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