By Jeff Clark, editor, Market Minute
The Treasury bond market has moved from one extreme condition to the other.
The last time we looked at Treasury bonds was back in March. Back then, longer-term interest rates were moving higher (which causes bond prices to fall).
Just about everyone was expecting that trend to continue…
But, when we looked at the iShares 20+ Year Treasury Bond ETF (TLT), we noticed it was extremely oversold. And, it was overdue for a bounce.
Since then, interest rates have fallen and bond prices have rallied. TLT is up more than 10% in the past four months – which is one heck of a move for a government bond fund. And, conditions have gone from extremely oversold to extremely overbought.
Take a look at this chart of TLT with its Bollinger Bands (BB)…
Bollinger Bands indicate the most likely trading range for a stock. Whenever a stock trades outside of its BB it’s in an extreme condition that’s likely to reverse.
If you look closely at the chart, you can see that TLT closed below its lower BB in mid-March. That move was the bottom for TLT. It marked the end of the decline phase, and the start of a new Treasury bond rally.
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Yesterday, though, TLT traded well above its upper BB. This is an extremely overbought condition. And, it creates a vulnerable setup for Treasury bonds.
TLT has enjoyed a magnificent bounce over the past four months. Many of the financial television talking heads who were bearish on Treasury bonds back in March have turned bullish.
But, the look of this chart suggests investors should be careful here.
At the very least, with TLT trading far above its upper BB, it’s going to be hard for Treasury bonds to sustain much more of a rally from here.
And, if the current overbought condition marks the end of the rally phase, then the coming decline could be significant.
Best regards and good trading,
Jeff Clark
P.S. Every week, my colleague and market analyst Eoin Treacy discusses what’s been happening in the markets lately.
Last week, he talked about bitcoin, inflationary pressures, and where copper is heading… and today he has another video out. Click below to watch it.
Eoin’s Insights
Happy Friday Market Minute readers. Today, I have another brand-new presentation on what’s been going on in the markets this week.
There’s quite a few things to cover today… I’ll be going over the trend in volatility, a potential breakout for Google, growth in Chinese companies, and how carbon credits are linked to inflation. Just click below to watch.
Reader Mailbag
Do you think Treasury bonds are now vulnerable to a significant decline? Or are you still staying bullish?
Let us know your thoughts – and any questions you have – at [email protected].