posted on 01 April 2017
Written by Jim Welsh
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.
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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:
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.
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