Thursday, September 22, 2011

Beware when the Treasury b-b-bond b-b-bubble b-b-bursts

Brrr - the price of U.S. bonds ($USB) could chill off after their parabolic hot ascent completes soon. Whether that's a matter of days away, or will take one more consolidation and final spike over the next several weeks. Here are some charts plus my comments. First, the $USB daily chart shows it's in a strong wave up consistent with most indicators, though with a slight negative divergence in standard RSI. It's a b-b-bubble, folks, so don't short it today! But when it breaks, it could be a surprising move, so do read my further comments below...

For context, here's a monthly chart of $USB going back 20 years. Persistent uptrend! But the most recent structure since the 2008/2009 high looks like a Fibonacci price pattern called "bearish butterfly". It means that, having gone beyond the prior high, and given the pattern since then (check out Hobbs' book, Fibonacci for the Active Trader), once $USB goes on to achieve a 1.272 or greater price extension of the prior high-to-low drop, it's vulnerable to a reversal. In this case, $USB will hit that level just over a price of $150. That price level might have seemed ludicrous last year, but we're closing it on it, possibly rather soon!

While $USB isn't guaranteed to hit $150, it's already poking new highs above $140, with good enough strength to get it there. For that matter, it's even possible it could get to a higher price extension, even if that means it consolidates first (perhaps in early October). So swing and KI$$ traders must still look for a pattern reversal, and spec traders must cover themselves if they short too soon.

Next are point & figure (P&F) charts for $USB and also $UST, based on the default settings at Interestingly they both sport a bullish price target of $150! Both show bullish breakouts triggered last month. These price targets mesh well with the Fibonacci extension level for the "bearish butterfly" I described above. This doesn't guarantee a trend reversal after $150 may be hit, nor give targets for a reversal, but does warn that we - and the many others who consider P&F charts in their analyses - will be eyeing $USB and probably $UST for a reversal trading opportunity at that point. Not to mention simply cashing out of long positions on signs of a bearish reversal.

Once a reversal comes, it's possible it might merely return to the 50-day moving average for support, at least at first. Which might be around $137 at that time, and there's prior-high price support there too. Really, the way $USB behaves after cresting - possibly just over $150 - will say a lot about how important of a top it'll be making. Given the chart patterns plus the fundamentals, we can't rule out $USB going into a higher-level trend reversal that cycles it down to lower lows.

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