The decline in T-bonds over the past three months has been epic.

The iShares 20+ Year Treasury Bond ETF (TLT) is down 15% since mid-July. That’s an incredible amount of wealth destruction for an asset class that is considered a safe haven.

And as the Fed holds interest rates higher over the long term, Treasury bonds are headed even lower.

Currently, treasury bonds are trying to find a bottom. But, in the short term, they’re due for a bounce.

Look at this chart of TLT…

At the low in early October, TLT was trading far below its 50-day moving average line (blue line). All of the momentum indicators at the bottom of the chart were in deeply oversold territory. So TLT was setting up for at least a modest dead-cat bounce to relieve the oversold conditions.

That bounce happened last week as TLT rallied back up to its 20-day exponential moving average (EMA) just above $88.

To create the sort of bottom formation that sets up a more significant rally, TLT needs to come back down and make a slightly lower low, while the momentum indicators hold above their recent lows. This will create the positive divergence that often precedes a change in trend from bearish to bullish.

The dotted black lines on the chart show how the price action could play out.

There are no guarantees, of course. But we do have the potential for a strong year-end rally in Treasury bonds.

That doesn’t mean traders should buy TLT at Friday’s closing price of $87.61. But if the fund sells off enough to make a slightly lower low (below $85) and the momentum indicators make higher lows, then we’ll have a low-risk/high-reward setup.

That’s when traders should look to buy TLT in anticipation of a multi-week rally phase.

Best regards and good trading,

Jeff Clark

Will you be buying Treasury bonds?

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