Eye on a Bond Bounce

 | Jan 03, 2014 | 8:50 AM EST  | Comments
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TLT

When I look at the weekly and daily charts of the continuous U.S. Treasury bond futures contract and the iShares Barclays 20+ Year Treasury Bond (TLT), I see something rather interesting. On both the bond itself and the TLT, the price is testing weekly-time-frame price support -- and so far that support is holding. (If you only looked at the daily charts, you wouldn't see this.)

Continuous 30-Year Bond -- Weekly
Source: Dynamic Trader

Now, I'm not yet convinced that a major low is in place, but we do have reason to start paying attention to this potential support level. On the weekly bond chart, the wide zone of support on comes in between 126'12 and 127'19.

TLT -- Weekly
Source: Dynamic Trader

On the TLT, I've broken down the support decision to these two areas: $100.87 to $101.31 and $100.15 to $100.31.

TLT -- Daily
Source: Dynamic Trader

On the TLT's daily chart, meanwhile, the trend is still bearish at this point: It's currently still flashing a pattern of lower lows and lower highs. However, a couple of factors around this last low have me thinking.

First, some Fibonacci timing cycles come due at this level. Second, the low was made at an extension of a prior swing, and many moves tend to terminate at such extensions, at least temporarily. So, yes, thus far the TLT is indeed bouncing off this weekly support, daily extensions and daily timing. But, on the way up, the price must clear the resistance -- the $102.90-to-$103.17 and $103.36-$103.94 levels, as is clearly illustrated on the daily chart. Otherwise, the TLT's decline could easily resume.

So this is the way I have to look at TLT at the moment. First, a countertrend rally is indeed developing off the parameters described above, and our risk is defined below the recent lows. Also, if TLT can clear the daily-time-frame resistance, and if it can also eventually take out the $104.41 swing high on the daily chart, then I will have to consider that the recent low might be a far more important level in the bigger picture. But if TLT fails to clear this resistance level, it will be vulnerable to new lows.

S&P 500 -- Daily
Source: Dynamic Trader

There's one last thing that could support a bit of a bounce in TLT: The S&P 500 would need to meet two key upside targets (including the 1.618 Fibonacci extension, target 2), and the index would need to be in a position to correct to the downside.

Bottom line: Let's see if the daily timing and weekly support is worth anything. Our maximum risk is defined below the recent low -- and you can also trail up stops as you move into the daily resistance to protect yourself as you go.

I'll consider myself wrong regarding the trade, if the fund takes out the recent $101.15 low.

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