After a solid, two-week-long rally, Treasury bonds are due for a pause.

Regular readers may recall it was back on October 4 when I suggested that the Treasury bond market was poised for a bounce. Being short Treasury bonds was the most popular trade in the market at the time. And the market rarely rewards such popularity.

So, from a purely contrarian point of view, a bounce made sense.

But that view was also supported by the look of the 60-minute chart – which showed positive divergence on two key technical indicators. That sort of divergence often leads to at least a short-term bounce.

And that’s what we got. Take a look at this updated 60-minute chart of the iShares 20+ Year Treasury Bond ETF (TLT)…

This chart is now in the opposite condition of where it was two weeks ago.

The MACD and RSI indicators have moved up from oversold levels and are now overbought. And while TLT has been making recent higher highs, the MACD and RSI indicators have been making lower highs. This sort of “negative divergence” often occurs at the end of a bounce. It’s an early warning sign of a possible reversal lower.

Here’s a look at the daily chart…

TLT is now bumping into the resistance of its 50-day moving average line. This is a logical area at which to expect at least a pause in the rally.

So, with the 60-minute chart showing overbought conditions and negative divergence, and with the daily chart bumping into a logical resistance level, TLT is due for at least a pause in the recent bounce.

If you bought Treasury bonds two weeks ago in anticipation of a quick bounce, you got that bounce. Now is a good time to take your profit off the table.

I’m not necessarily looking for a sharp reversal lower. But until the 60-minute chart can work off its overbought conditions, the upside looks limited from here.

Best regards and good trading,

Jeff Clark

P.S. Do you agree that the Treasury bond rally is over? If so, how will you be playing it in the weeks ahead?

Send me your thoughts, questions, or comments in an email right here…

Reader Mailbag

In today’s mailbag, Delta Report readers write in about Jeff’s earnings algorithm, and how it’s been working for them lately…

Hi Jeff. Thank you for the Harley Davidson earnings trade idea! I was able to get in yesterday at a good level and, due to demands at the day job, I set myself up on autopilot this morning to exit at $2.00…

I know I left some money on the table the way I had to do this, but it was a nice overnight gain. Keep up the great work!

– Alan A.

Jeff, I followed your advice – bought a half position on Monday and filled the rest Tuesday morning at a better price. I got out just a little early but still booked a nice 34% gain in one day.

Great strategy… I love the system. My only regret is that I did not go bigger, but we know what usually happens then, so I stayed with my normal position size.

Take care.

– Bob B.

Due to some instability of my internet connection I decided to just watch the HOG trade rather than participate and it is positively eerie how it is playing out exactly to the script you suggested.

Down to a low of $44.70, and now just touching $48 after the reversal your system suggested. Even with the somewhat elevated premiums going into the close yesterday, I can easily see how this could have been a profitable trade for me.

I’m not sorry I sat this one out, though, because there was just too much risk that the trade would get away from me during one of the internet hiccups I have recently experienced. New internet connection arrives on Friday, so I will be ready then.

In the interim, what a nice demonstration of how your earnings system is supposed to work!

– Paul W.

Jeff, I recently joined your service after watching you for years at Stansberry. I know I can trust you to wait for the good trades and you also tell us your thinking about risk level on every trade; just great.

I know you continue to refine your earnings trade algorithm and I wanted to suggest adding an 18th test to your system. Once in a great while, the market sentiments about a stock or even a whole market sector is so extreme that this sentiment overwhelms all other trading factors.

Although this extreme sentiment condition will likely be a somewhat rare event, it could still be useful to add this as a metric to your system. Of course, if your system is showing a drop in price after earnings in a hated stock or sector, then go for it.

On another note, I'm eagerly awaiting your essay on how to use LEAPS with a covered call strategy. Your teachings about trading adds tremendous value to your service. Thanks again for your efforts to make great trades for us all.

– Steve L.

And another reader had an idea on how to play the recent low volatility…

I so, so agree on volatility and cost averaging down on UVXY and TVIX. I know it’s for day traders, but it hit its lowest reading last week.

So enjoy following you!

– Pam D.