Is It Time for a Treasury Rally?

Guest Author: Guy Lerner is the managing partner of ARL Advisers, LLC and the publisher of The Technical Take blog.  ARL Advisers, LLC offers a tactical asset allocation strategy that is strategic, balanced, and targeted. His blog offers technical and quantitative insights on the equity, bond and commodity markets.

Lost in all the noise about crude oil this week and its effect on the economic recovery (i.e., the equity rally) has been the top in Treasury yields.  This article will cover the technical aspects of the Ultra Short Lehman 20 plus Year Treasury Fund (symbol: TBT) and the i – Shares Lehman 20 plus Year Treasury Fund (symbol: TLT).

Let’s start with a weekly chart (see figure 1) of the Ultra Short Lehman 20 plus Year Treasury Fund (symbol: TBT); this 2x leveraged ETF moves inverse to bond prices or in the direction of Treasury yields.  Key pivot points or areas of support (buying) and resistance (selling) are noted by the pink and black dots.  The pink labeled price bars are negative divergence bars.  As is seen in the gray oval, a cluster of negative divergence bars is a sign of slowing price momentum.  Not all negative divergences lead to a market top, but it is the break below this range and what appears to be a likely weekly close below the key pivot at 38.44 that will seal the deal for TBT.  Couple this with the failed breakout, and I believe you have a recipe for lower prices in TBT.  Look for TBT to retest the lows at 31.93.

For enlarged graph click here.

Now let’s look at the inverse relationships with i – Shares Lehman 20 plus Year Treasury Fund (symbol: TLT).

Figure 3 is a weekly chart of the TLT.  The black and pink dots represent key price levels.  These are areas of support (buying) and resistance (selling).  The red colored price bars are positive divergence bars, and clusters of divergence bars are typically seen at market bottoms and this can be seen (inside the gray ovals) in this bottom and the two prior intermediate term bottoms.  Over the past couple of weeks, price actually closed below support levels at 89.38, but in the following week, price had reversed higher.  This is a common pattern seen in many assets.  Prices trade below support taking out stops, and then they quickly reverse trading back above resistance (old support) levels.  A weekly close below 89.38 would nullify this set up.

Figure 3.  TLT / Weekly

For enlarged graph click here.

Figure 4 is a daily chart of TLT with the on balance volume (OBV) indicator in the lower panel.  Key pivot points are on the price bars, and we note that TLT is trading above the immediate key pivot at 91.27.  In addition, OBV is leading price higher.  These are positives.  An immediate price target would be at 94.65, which coincides with a key pivot resistance level and the down sloping trendline.

Figure 4.  TLT / Daily

For enlarged graph click here.

While the bottom for TLT (or top for TBT and yields) appears to be in, it is not clear whether this will lead to a sustainable move that would cause price to break the down sloping trend line seen in Figure 4.  My hesitation in making the call is my (yet to be presented) intermarket bond model.  This model is still bearish on bonds, but it is not unusual for it to lag the technicals at this point.  If the model turns bullish on bonds while the technical set up is developing, then I will have greater confidence in the sustainability of this price move.