Long Bonds May Have Near Termed Upsides

March 21, 2023No Comments

Today we’re going to do two things. First, we’re going to admire my pink bow tie and my post-Valentine’s gift from my wife, pink cuff links. So got to like the whole pink thing. I think it is women’s month right now. So not that pink’s only a women’s colour. Obviously, it’s not, because I’m wearing pink, but in celebration of, let’s say. So let’s get on with the topic of today, which is the bond market. And I’ve had quite a few people on the blog and through the video, links request that I cover the bond market. So I’m going to do that and I’m going to take both a longer view and the near termed view of bonds and just apply my two cents worth from a technical perspective to the charts.

Not very many charts to share today, just four of them. So we’re going to go right on that. And this, what we’re looking at here is the TLT, which is the US 20-year treasury bond. It’s kind of a benchmark for the long bond in the US. Now you can look by the way, at the longer-still bonds, they have other ETFs through iShares, but the 20 years kind of the one that everybody looks at, and quite frankly even the longer bonds than 20 years look pretty much the same. So TLT is what I’m looking at here and what you can see is you’ve got a trend line on the screen that goes back in this case 2004, but actually this trend line goes back quite a lot longer than 2004. And what you will see here is a break of that trend line in 2022.

near termed tlt chart

So as the Fed began its tightening process, the bond markets’ back was broken. And anybody knows that has been in the industry really since 1990, bonds, whether Canadian or US have been a pretty good ride. There was volatility along the way as you can see on this chart. But generally speaking, if you bought and held bonds, you did okay from a capital gain perspective and if you bought early enough, your yield at least from the purchase price was okay. Now yields got lower and lower obviously as the Fed was easing over that long-term period of time. Again, literally going back three decades or more. But all good things come to an end and that’s what we’ve seen here, both as yields stopped declining and started going up and the treasury long bond declined. So that’s the picture for the US and you’ll find that the picture is very similar on the Canadian side.

So what we are looking at here is a chart going back to 2006 roughly, and that’s because the iShares Canadian long bond index ETF only goes back that far. The TLTs been around much longer. So same chart though, as you’ll notice, uptrend until the good times ended for the bond market when rates started to rise, as the Bank of Canada started raising rates, the same thing. So trend was broken and we now are in some sort of a process of consolidation. So now I’d like to take a look at a more near termed chart of both of these and we’ll look at what these two might be looking like right now. So remember we were just looking at the long bond for the Canadian side, XLB ETF, and that trend line was broken, but even with a broken trend line, you can always get back to that trend line and that becomes often a point of resistance.

So if you can kind of envision that, in fact, why envision it? We’ll go back a step and see if I can do that anyways, and there it is. So you can envision that this was the trend line and in fact, this is a point of former support for the Canadian long bond. You can envision that if this base breakout were to happen, you would probably get back into that level, which in this case is about 22 and a half dollars. So I want you to keep that in mind as to what the view might be for long bonds. And actually, it could be positive at least for a relatively near-term trade. So let’s look at that.

What we have here on the XLB is a consolidation. You could call it a head and shoulders if you want, I don’t care. If this shoulder breaks and the neckline at around $20.75 is punctured to the upside, you’re probably looking at a return to that 22-and-a-half area. Not a lot of upside, but it’s looking like it is a good setup right now and that may happen. But as you know if you follow my work, you don’t predict, you do prepare. In other words, if you’re interested in trading the Canadian long bond, you don’t predict that a neckline breakout’s going to happen. You wait until it happens and then you wait a couple of days to confirm that breakout and then you enter the trade with the stop loss at the neckline, so if it doesn’t work out, it goes right back down into the cluster that it was in.

Near Termed Chart

You will have an identification of that breakout being a false one and in fact, just a spike as we call them. But you’ve got a discipline that says, okay, the trade did not work. I’m going back out of the trade. So that is how one would trade this relatively positive-looking charts so far. If we look at some of the indicators, we can see that money flow momentum is picking up. Now, remember, it’s an ETF, it’s not the bond market itself, but a lot of people do trade these ETFs, so it could be a good reflection. You’ve also got a hook from a relatively oversold level on stochastics, but that’s happened before through all of this cluster.

And you’ve got a rising RSI that is not over, but you’ve also, most importantly through this bottoming process, had a rising MACD. And that’s really important because MACD is a longer-term indicator, and if this MACD is continuing to move up, that gives us a pretty darn good chance of seeing that neckline broken and some upside on the bond. So there’s some positive news for you on the Canadian side. Why not take a look at the US side now? Well, same thing. Again, if we were to go back to that long-term chart, you would know that the trend line was kind of looking like this and then it broke in early 2022, right around here. That kind of lines up with this support level, doesn’t it? Around $130. Well, the neckline on this cluster is around 110. Now keep in mind there’s another chunk of resistance at around 117 or so, so we have to keep that in mind.

But let’s just assume that you did get that breakout. You might see a pause at 117 if it made it through that, then you probably are looking at a pretty decent trade up to $132 or $130 or something like that. That’s not a bad trade, especially on the bond market. So the US bonds actually look like they have a little bit more upside potential, again, contingent on a breakout. So how does the breakout look? Well, we do see a very nice spike in money flow, and that’s really positive. You’ll notice that whenever these moves happen, a crossover of the zero line of money flow momentum, you do get some upside. So that in fact would’ve happened right here and you had some follow-through. So it’s positive we’re seeing stochastics making a positive move up. It wasn’t that oversold, but it is moving up. RSI is moving up. It was not overly oversold. It needs to cross a little bit of resistance here, but so far so good.

Again, most importantly, you have a positive MACD. In fact, even this low was lower than this low so you had a couple of rising troughs and now it is moving straight up. So that’s some positives behind the TLT chart. Now at the bottom, by the way, I always do a money flow and you can see money flow has been negative through the entire process of declining stock prices, so that hasn’t changed. It might indicate that what we only get if we see a breakout, will be short-lived. We’ll have to see. But whatever the case, it’s my opinion based on everything we just looked at that the long bonds on both sides of the border, if they break out and there’s a very important word there, if they break out, they have pretty decent potential to do a short-term move. If I were to do the trade, I’d focus more on the TLT because the Canadian bond doesn’t seem to have as much upside as the US side.

Either way, you don’t buy until you see the breakout. You count a few days. My minimum rule is three days. And then you watch your stop loss, which is at the neckline. So if it breaks down and the trade works out wrong, you get out below the neckline, whatever the case, to answer a few of your questions. Do I like the bond market right now? I do, although I’m not in it. I would move into it as a trade if the necklines break, and I do think there’s some decent short-term upside. Thanks for watching.


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