Get ready for a big move in Treasury bond prices.
Two months ago, long-term Treasury bonds – or “T-bonds” – were coming off one of their strongest rallies ever.
[ad#Google Adsense 336×280-IA]But the chart of the iShares 20+ Year Treasury Bond Fund (TLT) – an exchange-traded fund that tracks the price of long-term T-bonds – was forming a precarious rising-wedge pattern.
I warned Growth Stock Wire readers that the “safe haven” trade was looking dangerous.
The T-bond market peaked a few days after that essay.
TLT pulled back 4% in just a couple of weeks – which is a large move for a bond fund.
And it has spent the past six weeks chopping back and forth in an increasingly tighter trading range.
But now, it’s ready to break out of that pattern…
Take a look at this chart of TLT with its Bollinger Bands…
Bollinger Bands measure the most probable trading range for a stock or an index based on recent levels of volatility. Traders can use the width of the Bollinger Bands to help determine when a larger move is coming.
For example, look at the Bollinger Band width indicator at the bottom of the above chart.
Notice that when the width expands to a reading above six, TLT is approaching the end of a trending move and is likely near a period of consolidation. And when the width contracts to a reading below three, TLT is moving toward the end of a consolidation phase and is likely to begin a larger trending move.
On Tuesday, the Bollinger Band width on the chart of TLT closed at 1.688. That’s the lowest reading of the year. You can look at the chart and see that the recent sideways action has caused the distance between the Bollinger Bands to shrink.
Energy is building. TLT is poised for a big breakout.
Of course, the real question is… which way will it go?
For that, traders can often look at other technical indicators such as the moving average convergence divergence (MACD) momentum indicator. We look for signs of positive or negative divergence, or for overbought or oversold conditions.
At this time, though, the MACD indicator for TLT is neutral – as you can see in the above chart. It has flatlined near zero. It’s offering no clue as to the direction of the impending breakout. Placing any sort of a trade on TLT at this point is at best a 50-50 bet.
All we can say for sure is there is a big move coming.
Perhaps the best strategy for this situation is to wait for TLT to break out one way or the other and then hop on board. The next move should be big enough to profit even for traders who don’t jump in ahead of time.
Today, TLT is trading around $140. If it can make a decisive move to more than $140.50, then it’s likely headed higher. On the other hand, a decisive breakdown to less than $138 should start a more significant decline.
Best regards and good trading,
Jeff Clark
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Source: Growth Stock Wire