Tuesday, October 25, 2011

Suddenly U.S. Treasuries look "good" so watch out here

It isn't just gold - U.S. Treasury notes and bonds are also spiking now, as a place where investors are moving money (or covering shorts) compared to other assets that suddenly seem a lot riskier. (Just wait and see what happens to the euro!). Treasuries dropped smartly from a recent head-and-shoulders (h&s) top, but found support in the past few days. There's support for bonds ($USB) at $137, for example, which is likely to be retested after the next high peaks. Let's look at that.

There are Fibonacci and point-and-figure (P&F) targets for T-notes ($UST) and $USB at $150. That may have seemed preposterous when I first posted about this a couple weeks ago, and during the drop from the h&s formation. But with the jump today from support, and given the global situation, money flowing into this relatively "safe" harbor can combine with short-covering to spike Treasuries to new highs. Head-and-shoulders formations don't normally signify exhaustion peaks, so that's another reason why we can look for higher prices in Treasuries.

I'll grant you that the technicals warn, this rally might fail and let Treasury prices drop again. These include the RSI/StochRSI backtesting the midline, and price testing the underside of the neckline support from the h&s break. So if buying (or staying) long, keep a stop under the lows of the past few days. As for shorting Treasuries - let the rally run first, and only start looking for short entries as Treasuries move to higher levels. The $150 price target has good validity and doesn't guarantee that'll be the final top. Yet there are good reasons, both technical as shown and fundamentally given economic realities, to think that the next wave up toward $150 will be the one that wanna-be short-sellers of Treasuries should be anticipating. That's also the time when KI$$ swing and position traders will want to consider something like TBT rather than TLT. TBT is an ETF that moves inversely to TLT (TLT being the ETF tracking Treasury bonds).

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