Looking Ahead: US Treasuries

• Posted by Greg Harmon
• on December 27th, 2010

As a reminder, this series of articles as a collection are intended to help frame the potential outcomes of the coming 12 months or so of the global markets. They are not intended to be a forecast per se, but to provide longer term deeper insight based on the current market structure. Each article is complete in itself, but the series together will provide a whole world focus, and as usual they will focus on price action, meaning there will be charts. Full schedule is here.

US Treasuries, TLT

Long term US Treasuries are a good measure of inflation expectations. In our current environment they can also be an indicator of the strength of the currency and the economy. Rising real rates show strength in the economy. The trick is to determine how much of the change in rates is from inflation expectation and how much from growth. I use the TLT, iShares Barclays 20+ Year Treasury Bond ETF, as a proxy for US Treasuries. Below is the monthly chart.

There is a lot of good that has been going on in this chart. First notice the rising trend from the beginning of the ETF in mid 2003 that has not yet been broken. Next there is support at the 38.2% retracement of that move still underneath the current price at 91.50. Also the midpoint of the Bollinger bands at 93.71 is providing support. Finally the 20 month SMA is also supporting the current price level. But there are also lots signs of weakness. The Bollinger band midpoint was cracked hard early this year and the shadow of the current candle has also cracked it. The high in August, although higher than the high in October 2009, was still lower than the high in December 2008 and barely exceed the Fibonacci arc. The 20 month SMA is rolling over, and the RSI is looking at 50 again. Finally the MACD is about to cross lower. All this is happening with big volume on the down side.

TLT Long term target 77.41

There are several paths the TLT could take to achieve this target, listed A, B, C. It could stall along the 84.45 to 85 support line where the Fibonacci fan line intersects and then pierce through at the Fibonacci arc, like A. Or that stall could result in a bounce higher back to the 38.2% retracement, and intersection of the Fibonacci fan and arc lines, and then a move lower like B. Finally the bounce could rise back to the downtrend line from the December 2008 high and then move lower. A glance at the weekly chart below gives some clues.

This weekly chart shows TLT testing the bottom Bollinger band and the 50 and 100 week SMA’s. But there is also a downtrend line that is resistance that will be reached shortly. With the RSI under 50 I expect that trend line to hold and reject TLT lower. This additional information suggests that path A is most likely. For the point and figure fans, a 3×1 reversal chart with a 1 point box size has a current price objective of 80.

(As always you can see details of any individual charts and more on my twitter feed and on chartly.)

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