Friday, December 9, 2011

"Are Bond ETFs Raising a Warning Flag?" (TLT; HYG)

From Forbes:
The completion of a developing chart pattern in this key bond ETF could decidedly shift the outlook for the stock market in the weeks ahead.
The bond bull market of 2011 is likely to be remembered for many years. The buying frenzy both in the US and overseas started early in 2011, and who would have expected the sale of MIT’s 100-year bonds to be oversubscribed?
The summer spike highs in the bond market did suggest a top was being formed, but after the initial round of selling, bonds have held up quite well. The technical patterns for the longer-term instruments can be interpreted as continuation patterns that would be resolved by another push higher in prices and a push lower in yields.
This is also the most likely scenario when looking at the long-term yield charts of the ten-year T-notes. The shorter-term instruments look more negative, while junk bonds look even more vulnerable.
For most, it is the liquid bond ETFs that can offer opportunities for investors and traders, and over the coming weeks, these funds should be watched closely.
Chart Analysis: The long-term chart of the yields on ten-year T-notes shows that on September 22, yields hit a low of 1.69%. Yields rebounded in late October, moving back to a high of 2.40% while stocks were also making highs.
  • The October highs form the upper boundary of a flag formation, lines b and c
  • Long-term support that connects the 2008 and 2010 lows, line a, was violated in August, which is negative for the intermediate term
  • The rebound has so far has fallen well short of the 38.2% Fibonacci retracement resistance at 2.48%
  • There is key support now at 1.88% and the downside projections from the flag formation are as low as the 1.28%-1.32% area
The iShares Barclays 20+ Year Treasury Bond ETF (TLT) hit a high of $125.03 on October 4 before reversing sharply....MORE