The most popular trade in the market right now is to be short Treasury bonds.

The trade makes perfect sense. The Federal Reserve is in “tightening” mode. It’s shrinking its balance sheet, and it’s raising interest rates. And it’s the expectation of higher interest rates that causes bond prices to fall.

So, like I said, being short Treasury bonds makes perfect sense.

But there’s a problem. You see, the market rarely rewards popular trades. So, with so many traders holding short positions on Treasury bonds, bond prices aren’t likely to fall much – at least not in the short term.

And, by the look of the following chart, the Treasury bond market might just be poised to bounce. Take a look at this 60-minute chart of the iShares 20+ Year Treasury Bond Fund (TLT)…

TLT sold off hard last week. Both the moving average convergence divergence (MACD) and Relative Strength Index (RSI) momentum indicators reached oversold levels. Since then, TLT has mostly chopped back and forth in a relatively tight trading range while the momentum indicators rallied. This sort of positive divergence often occurs near the end of a downtrend and is an early warning sign for a bounce.

The chart of TLT itself can be viewed as a “double bottom” pattern – where yesterday’s low retested last week’s low. Or it can be viewed as an “ascending triangle” pattern – where yesterday’s action formed a slightly higher low. Both patterns tend to lean bullish.

So, either way, it looks to me that Treasury bonds are setting up for a bounce.

Keep in mind, this is a 60-minute chart. Patterns on this timeframe tend to play out within three to five days.

Longer-term, traders who are short Treasury bonds may very well be right. But, in the short term, the popularity of this trade and the emerging bullish patterns on the chart have me thinking those traders are going to have to experience a little pain first.

Best regards and good trading,

Jeff Clark

P.S. Are you taking a contrarian stance on this trade? Or does the herd have it right, despite technical conditions?

Send me your thoughts, along with any other questions or suggestions, right here.

Reader Mailbag

In today’s mailbag, two readers respond to our latest Delta Report trade win…

Sold 10 TEVA call contracts for $1.20 this morning. Well on my way to recovering the investment in the lifetime subscription to your service and we haven't even hit earnings season yet…

– Paul

Just a comment regarding your TEVA call recommendation – I missed buying the call as it moved out of your recommended range before my order executed. On September 27, I found a put trade at the $17.50 strike price that I liked. I closed it this morning, based on your recommendation, for a nice $0.42 gain.

In the future when I miss on one of your call recommendations and have the luxury of seeing your call trade working out, I'll pursue selling puts on a similar strike price with less upside, but with less risk also.

Thanks for the great counsel.

– John

Another offers their appreciation for the ongoing website improvements…

Hi Jeff, thanks for the work you have done on your site. I am a two-year subscriber and have made my first trade with you recently and have had good results.

– Barbara

And finally, a reader offers a fresh take on short-term gold prices…

Hi Jeff, I know that you want to get back into the gold market and indicators do look like we are close to a “bottom.” However, are you sure you want to buy right before Chinese Golden Week? Historically, a period of falling gold prices.

– Harry