Wednesday, November 3, 2010

Now Back To Our Regularly Scheduled Programming

Ok, the elections are over.  QE2 is in the books.  The roadmap that I wrote about 2 weeks is coming together the way I saw it back then -- higher yields are in our future. 

Figure 1 is a daily chart of the i-Shares Lehman 20 + Year Treasury Bond Fund  (symbol: TLT).  This ETF moves inversely to yields or in the direction of bond prices.  Today's price action (i.e., price bar with arrow above it)  had the TLT trading above the key pivot resistance zone at 101.82.  A daily close above this level would have reversed the trend in TLT from down to up.  However, prices reversed hard on the QE 2 announcement.

Figure 1. TLT/ daily

The other important thing about this price reversal comes when we look at the indicator in the lower panel of figure 1.  This indicator measures sentiment in the bond market utilizing data from MarketVane.  Investors are bearish on bonds, which means we should have seen bonds bounce.  The fact that they did not bounce suggests that TLT, which is already oversold, is becoming more oversold.  This is the definition of a down trend.
Look for TLT to go lower and for long term Treasury yields to go higher.

Figure 2 is a daily chart of the Ultra Short Lehman 20+ Year Treasury (symbol: TBT).  This is a 2x leveraged ETF that moves inversely to TLT or in the direction of yields.  Resistance levels are noted on the chart.  It would not surprise me to see TBT to get to 38.46, which would probably coincide with the falling 40 week moving average by the time prices get to that point.  

Figure 2.  TBT/ daily

As a reminder, rising Treasury yields are likely to be a headwind for already overextended equity market. 


P said...

Hi Guy,

I love the blog but I don't understand how it's possible to do technical analysis using a leveraged ETF like TBT.
As leveraged ETFs degrade over time the same price at different points in time doesn't correspond to the same price for the underlying security. Does this not invalidate any attempt to specify support and resistance?


Guy M. Lerner said...

I am just looking at prices --where areas of selling and buying are likely to occur

I tend to look at only the instrument I am trading --that I am actually buying/ selling

And I try to do the same thing across time frames and all assets - this adds credence to my price analysis (I believe)

Specifically, I understand your question and what it means, but I am not sure if it matters as I am just looking at prices on a graph