Hello, and welcome once again to the Smart Money, Dumb Money Show. And I am your host as always Keith Richards, not of the rolling stones, but I am instead president and chief portfolio manager of ValueTrend Wealth Management. And this is a video on technical analysis. I do it once a week and I try to cover topics that can tie into, but are not directly correlated with the blog that I write twice a week. Many people who are watching this video, I’m sure, read the blog. We have something like 4,000 people peoples people kind every week that watch the, I should say, read the blog. And we’re always happy to invite new people to both subscribe to the blog and subscribe to this video. It’s easy to do so. You can go to the ValueTrend website, which is www.valuetrend.ca. And you can hit subscribe to either the blog or the video or both.
So today we’re going to cover a topic that I have been asked recently by one of the blog readers. And that was in the comments section. And by the way, I really encourage the readers of the blog to comment because I do read them and unless they’re rude or something, then I delete them. But I read the comments and I both try to respond as well as I can and I also draw ideas on what you guys are looking for as far as content and what you would like me to talk about. Well, one reader asked me about the long bond because it is pretty darn oversold. So we’re only going to look at one chart today. Although we’re going to take a look at that chart and we’re gonna flip it down from a monthly to a weekly to a daily, just to get the different timeframes in a different view on that chart.
But we’re trying to ascertain as to whether the picture for bonds is good or not. So let’s take a look and we’re going to actually share the screen. And we’re going look directly at the TLT, which is the US 20 year long bond. Now there’s different ETFs and you can look at the Canadian bonds, you can look at the US bonds in different timeframes in this 20 year one, but the 20 year TLT is a very, very closely watched representation of what the bond market is doing, particularly longer term bonds. So this is a good, good proxy, let’s say. And what you’re looking at here is a chart that goes back to 2003, on the left hand side of the screen, and it’s a monthly chart. So each bar is a month. So it’s a pretty long timeframe. We’ve literally got 20 plus years going on here, about 20 years, on the screen.
And you can see that the long bond, and even before this, before 2002, I should say you did have this trend line in place and it was very predictable. You could see literally the troughs either came very, very close, like it did here, or literally touched the trend line. So it was pretty predictable. At times, it gapped off a bit, but when it gapped off it would fall. And that’s one of my rules. If you take the technical analysis course that I have, the online course, you’ll learn that when any security gets too far off of a well established trend line, you are in for some sort of a correction. The other thing that I like looking at though, is if a trend line is broken, and that is what happened here. So 20 years of nothing but up, actually more than 20 years, and then boom, and it broke decisively.
I mean, this moved down in big bars and is well below the trend line. However, for the astute student of technical analysis, and especially if you’ve taken my online course, one of the things I talk about is measurements of oversold or overbought securities. One of them is, like we just mentioned, a move off of the trend line by too much. Could be too much down or too much up. The other thing we can look at is how is the security moving and what is the gap between a 200 day moving average and its current price. Now a 200 day moving average is roughly equivalent to about 10 months. So I’m using a 10 period moving average here. It’s not precisely 200 days, but horseshoe and hand grenades. And what you’ll notice is is that the gap, like here we had a gap where the market had move below the 200 day/10 month moving average.
And that was about 10% or so. And my rule of thumb is if a big index like the S&P 500 for equities and the TSX or the bond market, like this, moves about 10% or more above or below the 200 day moving average/10 months then you’re probably looking at an oversold or over bought condition. Well, guess what? The 200 day was just, again this is a monthly chart, recently the 200 day/10 month was around 134, but the TLT index itself, the ETF itself, is around 111. So you do some thinking here and you can pretty much figure out just by using some quick mental math that that’s pushing 20%, not quite, but it’s getting darn close to 20% difference between the moving average and the price of TLT. Well, that’s a pretty big gap. And that means it’s pretty oversold.
So even though the big picture is bearish, the question is, could this have a nice move up? And especially if we move into a recession, say six months from now or whatever, whenever that may happen, and you can read my blogs, by the way, on that topic of recession. What you’ll learn is that I’m pretty darn convinced that we’re going to move into a recession despite what your local government authority will try to convince you of, which is that, oh, it’s a very low risk for a recession. Well, I don’t think so, but that’s another topic for another day. It’s actually in my blogs of late, you can read them. But if we do move into a recession, what happens? They go from what they’re doing now, which is raising rates to kibosh inflation, to lowering rates to stimulate the economy. Guess what lowering rates does.
It helps fixed income securities. So that’s an interesting thing to think about because right now the TLT is so low below it’s 200 day moving average. And if you look at the momentum indicators on this indicator, this index, I should say, you will see that even though stochastics, for example, now this is a monthly chart keep in mind, stochastics is the fastest moving indicator I have on this screen. And it has been diverging negatively. It was giving us a heads up before the market broke, but it’s pretty oversold. And you’ll notice, whenever stochastics gets oversold, below this line, and hooks up you get a rally. It happens pretty consistently. Okay? So you can, you know, try to draw up from here. You’ll notice that it’s a pretty consistent, pretty reliable indicator for short term moves. Doesn’t mean it changes the trend.
It means it’s oversold temporarily. So here we have something that has happened recently that not only is stochastics below its its trigger line. Now, remember it has to hook up and it hasn’t done that, but you have RSI for the first time, like literally in 20 years, it’s oversold. And you can see that when it gets over bought it’s definitely signaled very good topping signals, but we haven’t had an oversold signal on the RSI on TLT for a very long time, at least on the monthly chart. So that’s a pretty interesting thing. And that possibly sets us up to agree with that rule of mine, where something is more than 10% above or below it’s 200 day moving average, it may be time for a oversold bounce or pullback. Whatever the situation may be. These indicators are starting to tell us that on the big picture basis, we may be in for some sort of a move on TLT to the positive. The final thing we’re looking at.
This, by the way, is the TLT versus the S&P 500 which, believe it or not, even though the S&P’s done pretty bad the TLT has actually done even worse. So when this line’s going down, it means it’s relative performance to the S&P 500 is bad. So, final thing we’re gonna look at is MACD. Now, again, if you take my technical analysis course online, you’ll learn that there’s a couple of biggies that I like to look at for big picture momentum. A rate of change being one of them on a big scale and MACD and especially when it’s on a monthly chart. So MACD is definitely moving down. It has shown no signs of hooking up, but generally speaking, when you look at the histogram, which is these blue lines on a MACD you can get oversold signals.
So ahead of a move up like here, you had the cross, the bullish cross on MACD, but the MACD was oversold well before that. So you might have got some indication, even if it had been like this, just a short term blip, or like this one. When it crossed the zero line, it was starting to get over sold. We are well below right now. We are well below zero line indicating that the market is pretty oversold for this security. So I’m going to do this. I’m going to just come down to a weekly chart. So we keep all the same indicators on, and you’ll notice the top, by the way is money flow. You can see money flow had been leaving the ballpark, but it’s starting to, actually this is momentum, money flow momentum. It’s starting to pick up, which is good, because typically when it starts to pick up, you get a rally and you’ll see that time after time it starts to cross over the zero line.
So if you still see a crossover at the zero line, and that could happen because it’s basically there right now, you could have another argument for a possible move up. But this is a weekly chart, so we’re going to look where do those same indicators stand on the weekly chart? Well, stochastics can stay buried in oversold or overbought, like it was here, periods for long periods of time and the reason is because it’s a super short term indicator. So if things get oversold, they can stay oversold or over bought for a while and that’s been the case now. But RSI not so much. And you’ll see that often when it goes deep in the red, it does signal pretty good upside. Now it doesn’t happen all that often. Happened way back here in 2016. And we did get a bump on the TLT after that.
So we’re getting a pretty deeply oversold and the other interesting thing we’re seeing here is positive divergence on the weekly stochastics and on the weekly RSI. So we’re seeing positive movement up, even though the market’s not so much up, it’s still moving down. So finally you have MACD which has already been moving up and you have the makings of what could be soon a crossover, a bullish crossover, on the MACD. I’m not predicting anything, but there’s a few indications on the weekly chart that we’re looking at a possible blip up on the TLT, on the bond market, meaning that you could see some upside. How long it lasts, I don’t know, because remember the monthly chart we looked at had that big break of the trend line. So that’s a bearish thing, but on the short term, we could be seeing a move up on the bond market.
So let’s go to the daily and this is like pulling out the microscope, because you want to know what, you know, the bacteria or whatever you’re looking at really looks like up close. So this is the daily chart. You can see it’s been in a pretty bad down trend. It’s trying to rally a bit. And you can see it did on that super oversold level. You did get that hook up on stochastics. You did get that hook up off of MACD or sorry off of RSI. How long does it last? I don’t know, because typically you’ll notice that the middle line, particularly on RSI, can act as a point where it stops moving up. So that’s just about where we hit and it’s already starting to move a little bit down right now. So the move might be over on TLT, but some of the bigger charts that we were just looking at, like the monthly and the weekly suggests that maybe there is a little more to come on the upside.
It’s a gamble to me. I personally am not a buyer of bonds right now. And that was what the reader, starting off this blog, that inspired this video, I should say. What inspired the video was the reader asked me, what do you think of the bond market? And especially with the recession coming? Well, my answer is short term, and this is the way I answered his question on the comments, I said in the short term, sure there could be a move up. So I’m presenting you with some evidence for that possibility, not necessarily a probability, but a decent possibility. But I will not necessarily be an outright bull on the TLT. I just want to take you back. On the bond market, I’m not going to be a bull until we see a genuine move at least back to that trend line and, or at least, starting to make higher highs and higher lows below the old trend line.
And I want to see that good old Fed or Bank of Canada has finally admitted that they’re in a recession and they are moving rates down again because that’s an almost sure thing. There’s no such thing as a sure thing in the world of security analysis, but that’s an almost sure bet that you’re gonna make money on bonds. So until that point, I’d say, look, if you’re a speculator, if you’re a short term trader, if you want to take some risk, it’s maybe a decent possibility that you could make some money on the bond market this summer because it’s so oversold simply for that reason. But until the Fed makes its move, I think that it’s nothing but a short term move. So I hope that helps for anybody that was wondering what my outlook is for the long bond. Thanks for watching. We’ll see you next week.
