Operation Twist Trades with Stocks

• Posted by Greg Harmon
• on October 12th, 2011

Since ‘Operation Twist’ has been in the public thought process many bond market participants played the anticipated flattening of the yield curve by buying long bonds and selling shorter maturities. Others market participants bought the iPath US Treasury Flattener ETN, $FLAT. There may be good fundamental reasons for doing this but the technical picture is mixed. Could it be because the Operation is already priced in? I bet the Federal Reserve would not be happy about that. Maybe it is because $FLAT only measures the flattening between the 2 yr and 10 yr Treasuries, both of which the are a big piece of the Fed’s current inventory. What I know is that it looks ready for a 4% move. Let’s take a look.

iPath US Treasury Flattener ETN, $FLAT

iPath US Treasury Flattener ETN, $FLAT has fallen back and is testing previous support at 54. If it were to break through lower then the next levels of support are at 52.20 followed by 51.40 and 50. The Relative Strength Index (RSI) is teetering on bearish territory and the Moving Average Convergence Divergence (MACD) indicator is growing more negative, both supporting more downside. If however it does hold support at 54 then there is resistance higher at 55 followed by 56, 57 and then the previous high at 58.65. Where there is no guarantee that it will do either or run to the extremes it seems likely a 2 point move in either direction, or 4% roughly, is in the cards. Perhaps this uncertainty on direction comes from the fact that the two pieces are both moving low and the direction of $FLAT is really determined by which one is moving faster. Two ETFs, the iShares Barclays 7-10 Year Treasury Bond Fund, $IEF, and the iShares Barclays 1-3 Year Treasury Bond Fund, $SHY, can be used to illustrate.

iShares Barclays 7-10 Year Treasury Bond Fund, $IEF

iShares Barclays 7-10 Year Treasury Bond Fund, $IEF, showed topping candles the last three weeks which are being confirmed with a move lower this week. The RSI is heading sharply lower and the MACD has just crossed negative, both supporting more downside. Should this confirmation hold then the next support level lower is at 97.50 followed by the rising trendline support at 95.

iShares Barclays 1-3 Year Treasury Bond Fund, $SHY

iShares Barclays 1-3 Year Treasury Bond Fund, $SHY, has been moving lower toward the uptrend line support at 84.25 since the RSI peaked in early August. Recently the MACD crossed lower as well. Below the trend line, there is support at 84.12 and then 83.80.

Which one moves down faster will determine which way $FLAT breaks. But who knows which it will be. But with both looking lower why not trade the pieces instead?

If you like what you see sign up for more ideas and deeper analysis using the Get Premium button above. As always you can see details of individual charts and more on my StockTwits feed and on chartly.

If you like what you see above sign up for deeper analysis and trading strategy by using the Get Premium button above. As always you can see details of individual charts and more on my StockTwits page.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

blog comments powered by Disqus