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posted on 01 April 2017

Bonds Are Headed Higher

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TLT - Rally Is Not Over

As previously noted, TLT declined in a 5 wave pattern from the high last July. The completion of any 5 wave pattern, up or down, is often followed by a retracement in the opposite direction of the 5 wave move. Since TLT fell in 5 waves, the retracement will result in an up move.


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At a minimum, TLT should at least rally up to the high of wave 4, which is just above 123.00. From its high of 143.62 last July, TLT declined 27.13 points. A 38.2% retracement would lead to a rally to 126.85, while a 50% retracement would bring TLT back up to 130.00. The rally from the low to the recent high suggests the rally is not over.

Click on any chart for large image.

As you can see (next chart below), TLT rallied in 5 waves from the low to the high of 121.91 and gained $5.49 in the process. Since a5 wave move is often followed by a retracement in the opposite direction, I expected TLT to pullback.

As noted in the March 27 Weekly Technical Review:

“The yield on the 10-year is approaching resistance between 2.31% and 2.33%, so a modest rebound in yields in coming days is likely. Today, TLT pushed above its green down trend line but closed on the line, which reinforces that it is near a short term high."

Since the high on March 27, TLT has indeed fallen and yields have ticked higher. So far, the pullback has been an a-b-c and may have ended at today’s low. Right now there is no way to be certain until TLT rises above the recent high. Wave a down was from $121.97 to $120.49, a decline of $1.48. TLT then bounced in wave b to $121.38. An equal decline of $1.48 for wave c could bring TLT down to near 119.90, which is another reason why wave c may not be over.

So far the low Friday was $120.21 so wave c could extend a bit more. From whatever low is established for wave c, the expectation is that the next move up should be close to the initial rally of $5.49. So if wave c ends at $119.90, TLT could rally to $125.38, which isn’t too far from the 38.2% retracement of $126.85. If today was the low for wave c at $120.21, the target would be $125.69.

The next wave up should also be 5 waves, so we will be able to adjust the upside target as the next rally unfolds.

The main point is that the probability of the yield on the 10-year Treasury dropping below 2.3% and the 30-year falling below 2.92% has risen based on the 5 wave rally in TLT off the lows. You can see also 5 waves down in the yield on the 30-year Treasury yield and 10-year. See charts below.

Jim Welsh

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