The temporary fiscal cliff ‘resolution’ started the new year off with a big rally in equities, sending the S&P 500 to the best levels since mid October and just twelve points below the 2012 high.  Bonds on the other hand took a beating and look vulnerable for further weakness ahead.  The 10 year Treasury yield rose to a yield of 1.84% as a result, but let’s look at bonds in terms of price for purpose of simplicity and trading.

From a longer-term perspective bonds remain in a mighty up-trend.  The 10 year Treasury bond futures price noted in the chart below remains in a solid up-trend, hence it’s too early to call for the end of the bull market in my humble opinion.

Nearer-term however things look different, which is my focus in today’s analysis.

Using the iShares 20+ Year Treasury ETF (TLT), which works as a basic proxy and trading vehicle for the 10 year note but does have a different duration (in case you care), there are two basic support levels of note: The March 2012 lows near 109 and the September 2012 lows near 118.  To be clear, the way I use these simplistic support lines is for reference levels rather than defined hard stop or targets.  FYI, ‘reference’ levels work well in current times where markets are controlled by central banks and news-bits strategically placed by politicians.

The September 2012 support level near 118 is only 1.50 points or 1.25% away/lower from yesterday’s closing price.  More importantly however, note the series of lower highs since the late July top.  With four lower highs in place, the odds favor a lower low to arrive sooner rather than later.  A lower low here would mean the iShares 20+ Year Treasury ETF (TLT) has a daily close below 118.

The 118 support level also happens to coincide with the 61.80% Fibonacci retracement level of the March – July rally.  If and when this level gets broken, price should have enough momentum to slide closer to the 114.50 area.

Given the current structural environment of risk on/risk off phases, the high correlation among asset classes needs to be considered when looking at bonds.  In the case of bonds, and the iShares 20+ Year Treasury ETF (TLT) vehicle, the currently inverse correlation between stocks and bonds must be kept in mind.  As long as central bank interference remains high, bonds should get better bid during equity sell-offs and vice versa.  So, if equities continue to run higher into deeper January bonds have a good chance of continuing their slide and the  iShares 20+ Year Treasury ETF (TLT) reaching down to the 114.50 area.

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