U.S. Treasury bonds buoyant - will they make new highs?

U.S. Treasury 10-year notes ($UST) and bonds ($USB) have been identified by many as likely to decline, including in Tony Caldaro's Objective Elliott Wave methods (see his Elliott Wave Lives On site in the list at right) as in the throes of a bearish wave C down. But they popped up again over the last few days, as shown in the charts of the ETF called TLT (see daily and weekly charts of TLT below). Is this a new uptrend? To answer that, I'm also going to refer to my alternative idea of a large triangle forming in these longer-term notes and bonds, marked on these charts especially on my weekly chart below.

First a quick reference to Tony Caldaro's wave C down idea - that idea is not negated by the recent swing up, but today's move above the downtrend line I marked on the daily chart makes it somewhat less likely. While I cannot speak for Tony, the wave count for the wave C down idea as I can best understand it, should be a wave 1 down finished about November 2009; wave 2 up finished at the end of November 2009; then wave (1) down finished in January. So the wave (2) up should already have finished earlier in February - not iron-clad, but most likely. And we woud not expect TLT to make a high that's higher than where it went about a month ago. This is one reason why I want to revisit my alternative idea of a large triangle.

If it's a triangle, does that make it bullish or bearish? Candidly it can go either way! I'm in agreement with Tony that TLT should be in a large B wave, but a B wave can sometimes take the form of a triangle. If it's a B wave triangle forming after the completion of a zigzag wave A bottomed in the summer of 2009, then it can either be completed or might even complete over the next week or so, possibly with a slightly higher high. The downtrendline I marked on the daily and weekly charts is rather steep for a typical triangle and can actually accommodate a slightly higher movement.

The easy way to tell if it's a bullish versus bearish triangle is to see whether TLT moves above $98.97 (bullish), or below $88.45 (bearish). That's a very wide range! So traders including me, want to know if there are clues without having to wait for TLT to move out of this range. One clue will be if TLT exceeds the horizontal lines I've marked on the daily chart. Again, not conclusive, but doing that would make it less likely. Notice too that the Stoch RSI indicator on the daily chart has entered overbought territory - this particular indicator can persist that high for as long as a trend is in force, so some traders might want to wait to see when it falls down from that level.

The other indicators really can be consistent with a triangle either way. I've done some additional markings on the charts below to show that.

There are times when bonds move with stocks, and times when bonds move opposite from stocks. Lately it seems to be opposite, although it's possible that when bonds do break support, that could create a scare that will infect stocks too. Depending on the timing we'll just have to see. Our general thesis on stocks is that we should see a high in May, and maybe another good high in August. Obviously if the movements are inverse, that would imply lows in bonds during those same time windows.

Another factor is the scale of the thing. If it were a bullish triangle, I'd have expected the rise off the lows - which would be the B wave up, to have retraced much higher to the peak. A .786 retracement would be common, but it didn't even make 50%.

For now, the buying interest evident in the TLT chart has been pretty good over the past week or so, yet on the weekly chart it looks a bit more concerning. Because of the way the weekly chart lumps the days together, it is possible the weekly chart is masking some of the buying volume - that's another reason why the StochRSI indicator is up right now. Overall, it doesn't look like bonds are ready to cascade down quite yet. So that's why I'm willing to keep entertaining my alternative triangle idea with the possibility that TLT can remain buoyant for a week or so longer.

Since my perspective is skeptical (read: bearish) on bonds for the longer time period, I'm waiting this out to some extent, and looking at adding to bearish positions (such as TBT) on rallies in TLT. I won't be happy if it exceeds $96, but I won't abandon the defensive stance unless TLT exceeds that important $98.97 level. Another easy test that many may use, is to see if TLT moves above its 200-day moving average (and notice it's below the weekly Bollinger Band midline too). If TLT goes above the 200-day MA, then it can be a good approach to step aside (or switch and go long for a bit) until it looks ready for selling again.