For those who follow the long-term bond market, you have likely seen many trying to call the top to the market. And, many have tried multiple times. Through the years, bonds continued to chug higher and higher, write Avi Gilburt and bond analyst Xenia Taoubina.
On June 27, 2016, we sent out a major alert to our members at Elliottwavetrader.net entitled “Beware of Bonds Blowing Up.” Yes, we took our turn in attempting to call a top to the bond market. A little over a week later, the bond market struck its highs. Since that time, iShares Barclays 20+ Year Treasury Bond ETF (TLT) has dropped almost 20%.
Since Xenia Taoubina began providing her bond analysis to our members at Elliottwavetrader.net two years ago, her view has been that TLT was going to strike a significant high in 2016, and set up a large decline off that high. That’s exactly what we saw, followed by a nearly two-year long decline in the price of bonds (rise in yields).
However, at this time, Xenia is viewing the initial phase of the decline off the 2016 highs as coming to a completion. She is expecting that we are approaching a multi-month bottom, with TLT expected to hold 113/114 area as support.
Allow me to elaborate. Xenia is viewing the TLT as completing what in Elliott Wave theory is known as an impulse off its 2016 high, (with an outside chance that that decline already completed at its 2017 low of 116.51). So, whether the TLT is able to remain over the 2017 low or not, her expectation is that downside from here is relatively minor, and that TLT will likely hold the 113/114 support region.
On the upside, Xenia expects that TLT will, at a minimum, revisit the vicinity of the 2017 high (129 area), with lesser potential for a rally over its 2016 high. While there are no certainties in the market, with TLT trading around 117 at the time of writing, this represents a risk of 3/4 points for a probabilistically favored rally of at least 12 points -- an attractive risk/reward.
While it is her expectation that TLT will not breach 113/114, if TLT breaks this level, that will open up potential for acceleration lower, so our bullish view hinges on TLT's ability to hold this support area.
What this suggests is that, if this support region holds, it is much less likely that the Fed will be raising rates during the last half of 2018, and maybe even into 2019. And, if it does, then the market may have a mind of its own, which may shock market participants.
See chart illustrating the wave counts on the TLT.
No holdings.
Avi Gilburt is co-founder and Xenia Taoubina is an analyst at ElliottWaveTrader.net, a live Trading Room featuring intraday market analysis on U.S. indices, stocks, bonds, precious metals, energy, forex, and more, along with an interactive member-analyst forum and detailed library of Elliott Wave education.
