There haven’t been many places for investors to hide over the last several weeks…

Even bonds – traditionally considered a safe haven – have been falling right along with other risk assets like stocks and cryptocurrencies.

It’s mostly due to the bond market’s fears regarding inflation.

With the Fed in the early stages of a rate-hike cycle, investors have been forced to reckon with a new reality where low interest rates are a thing of the past…

First, it’s important to note that the higher the yield, the lower the price of a bond and vice versa.

So, with the Fed set to raise rates over the next several committee meetings, bonds have been selling off quickly.

But based on my analysis, I believe Treasury bond traders may have gotten ahead of themselves and that the bond market may be due for a relief rally.

That’s why today we’ll be looking at the iShares 20+ Year Treasury Bond ETF (TLT).

TLT is an exchange-traded fund (ETF) that tracks the investment results of a basket of U.S. Treasury bonds with remaining maturities greater than twenty years.

(If you’d like to learn more about this ETF, just click the link here.)

Now, let’s look at a price chart of TLT…

(Click here to expand image)

There are four key elements to this chart:

1. Key Support Level from October 2018 (red line): This support level comes in at 112 and is a major swing point in TLT.

   After putting in this low back in October 2018, the market went on to rally to 171 – a 52.68% move.

   The market is now pressuring this multi-year low, and I’m interested to see if bulls can defend it.

2. Multi-Year Trendline Going Back to 2007 (straight blue line): This support line connects bottoms from July 2007 and January 2011.

   It comes in around 107… right below that major support level of 112.

3. Most Oversold RSI Reading in the History of TLT (orange circle): The Relative Strength Indicator (RSI) is currently giving a reading of 21.56 – the most extreme oversold reading in the history of TLT.

   Meaning that bearish momentum is likely reaching a peak.

   The combination of two important support levels and this extreme RSI measurement is strong technical evidence to start looking for a bounce in the bond market.

4. 9-Period Exponential Moving Average (EMA – blue squiggly line): The 9-period EMA is a short-term trend.

If we do get a bounce in TLT, this EMA can serve as a potential target. Right now, the 9-period EMA is around 122.

To clarify, TLT isn’t out of the woods just yet.

If we do get a bounce, it’s more likely to be a bear market rally. Meaning that after the bounce is finished, we’ll eventually get fresh new lows.

But even in a trending market, prices can only run so far before temporarily running out of steam. And this current sell-off in TLT looks like it’ll need to take a breather before trending again.

That’s what makes TLT so interesting right now.

Targeting the 9-period weekly EMA would give us a potential move of about 7% from current levels… not bad for a short-term trade.

Happy trading,

Imre Gams

Analyst, Market Minute

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Reader Mailbag

Will you focus more on the bond market now that interest rates are set to rise? Or do you usually avoid bonds?

Let us know your thoughts – and any questions you have – at feedback@jeffclarktrader.com.