As discussed in the Weekly Technical Review in recent weeks, iShares 20+ Year Treasury Bond ETF (TLT) was approaching the end of a five-wave decline from its peak in March 2020 at 179.70, states Jim Welsh of MacroTides.com.
There is a chance that TLT could drop below 80.00 in response to the third quarter GDP report showing the economy growing at 3.5% or more when the report is released on October 26. However, the amount of potential weakness must be compared to the potential upside gain if the price pattern analysis is correct. Once the five-wave decline is complete TLT will retrace a portion of the drop from 179.70 to the low on October 23 of 82.42. It would be reasonable to expect the retracement to cover 38.2% of the 97.28-point decline which would bring TLT up to 119.58. A 23.8% retracement would lift TLT to 105.50, and a rebound to wave four of a lesser degree is 109.10. The risk-reward is an additional decline of four to five points compared to a gain of at least 21 points and as much as 35 points.
Several technical reasons suggest that TLT bottomed on October 23. The five-wave decline for Wave five could be finished with today’s low, which would also finish the five-wave drop from 179.70 (Red numerals). At last week’s low there was a big positive RSI divergence to the October 2022 low (24.9 vs. 17.5). (Chart above) On October 19 the ten-year Treasury bond futures made a new closing low as did the 30-year Treasury bond futures. Both registered a positive RSI divergence (Lower panel on each chart) compared to the low on October 3.
On October 23 the 30-year Treasury bond futures fell to a lower low compared to the low on October 19. Importantly, the ten-year Treasury futures failed to confirm the lower low in the 30-year, registering an inter-market positive divergence. As I’ve discussed the opposite occurred in March and April when a negative inter-market divergence signaled that the trend in Treasury yields had reversed to up. In addition, the 30-year Treasury futures have signaled a two-day Key Reversal by recording a lower low on October 23 than the prior two days and a higher high. The long bond futures are up significantly so an up close to likely.
It’s time to buy TLT. TLT is currently trading at 84.73.