Thursday, December 15, 2011

Short U.S. Treasury bond bubble - now, or just soon? Charts views

As U.S. Treasury bonds flirt with a price often associated with Fibonacci - $144 - and are widely perceived to be in a bubble, it's time to look seriously at selling (and even shorting) these bonds. First we'll look at various charts, then we'll talk about strategy. These charts will include $UST, $USB, TLT and TBT. I decided to start with the default point and figure (P&F) charts from for the ETF that tracks the U.S. long bonds, TLT, as well as an ETF that goes inverse to that - TBT. Right away we see that TLT is deemed to have triggered a reversal pattern pointing from the current level about $120 down toward a bearish target about $94. Concurrently, TBT is deemed to be in a bullish reversal pointing upward from around $18 toward a projected $33.50. So, these charts indicate that TLT is already in sell mode, with TBT in buy mode.

Interestingly, the charts of $USB - the "long bond" - and $UST - U.S. Treasury 10-year notes - remain somewhat more positive. They both actually have P&F targets of $150, even though $UST is farther from that in the $130's compared with $USB in the $140's. My long-term Fibonacci target for $USB is also $150, as I described in a post on this topic a number of weeks ago. So, one strategy could be to start any selling/hedging/shorting with the long bond ($USB) and/or the ETFs mentioned above, then apply that to $UST (or IEF, tracking the 10-year note) as well if $UST either hits $150 or fails support first. (Note, it's possible from a fundamental perspective as well, as investors may start having more heartburn sooner about the U.S. situation for the longer-term bonds.) Support for both is indicated at the "reversal" red line marked on the P&F charts for each of these (included in the lineup here, again courtesy of This approach might be appropriate for the types of investors who manage significant holdings of Treasury notes and bonds.

For others, an approach would be to sell, hedge, or short TLT, or alternatively buy TBT. The question of timing comes into play for any strategy. There are indications that the correct timing of a cycle high for U.S. Treasury bonds won't arrive until January. That fits with the fact that we don't see $USB at $150 yet. So any step to sell, hedge or short, may well be premature. It could work temporarily, with a near-term dip in these bond prices. But don't be caught off guard if and when prices firm again to hit $150 in several weeks!

Some traders, maybe even KI$$ ("Keep It $imple $wings") may be just as happy to start edging into the position of gaining from a drop in Treasury bond prices, recognizing that bond prices may continue bucking and trying higher between now and January. The bond price upside isn't that much compared with the downside. After all, the top in bond prices that's being worked out during this time, may well be "the" bond bubble peak.

It's also possible that TLT is already bearish (and TBT bullish) because traders who see what's happening are already beginning to exit the long side, even while buyers of U.S. bonds continue to want them as alternatives to other securities perceived as increasingly riskier. So U.S. Treasury bonds could actually top out later than the ETF does.

Picking a top can be just as dicey as picking a bottom (stinky!!). But the Fibonacci projection for $USB to $150 lends support to the P&F projection. So if taking any action now, remain nimble enough to take short-term profits and allow for another run up over the next several weeks. But if and when bonds hit higher into January - especially on $USB tagging $150 - consider it to be like ringing the bell on the bond bubble.

NOTE: as always, the information and statements here are commentary only, and should not be construed to be financial advice. Consult your own financial advisors before making or changing any investments.

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