Saturday, April 6, 2013

Are US Treasury Bonds getting ready to flash crash?

Are US Treasury bonds moving into position for a flash crash? This sobering possibility is starting to look realistic, based on the charts and technicals. Yesterday's spike flight to safety as equity markets fell hard early Friday morning was accompanied by a fascinating mix of capitulation and high-volume moves into high-probability resistance. We'll review the charts, including the possible paths that trading may take the US long bond. First the popular ETF for the US long bond, TLT (this and all the charts here were made using It made a huge jump Friday with a candle sometimes called a spinning top, closing lower than most of the day's price range. You'll also see it landed right in a volume-price resistance zone, and a price area that easily can form the right shoulder of a bearish head-and-shoulders (H&S) pattern. Maybe the right shoulder will take some days or a few weeks to play out - yet it's also possible Friday's spike may double as an island reversal. If next week's price movements leave it isolated by an "air pocket" down, it'll look like an island reversal.

What about the inverse ETF called TBT? You can hardly see the price candle where it dropped Friday because of the huge volume, which looks like a combination of capitulation plus potentially massive interest. It's either a crisis, or an opportunity! Sure, it needs to confirm a bullish (for TBT, bearish for bonds) inverse H&S by moving up again. Assuming it does, that signals the opportunity for TBT to go on an uptrending path.

Next I'll show the daily, weekly, and monthly charts of the US Treasury 30-year bond, which still trades and can be charted at using the symbol, $USB. (The 10-year notes are assigned the symbol $UST.). You can see the daily hit resistance of the 200-day moving average. For avid chartists, I'll also note that filled a price gap that'd occurred on the initial drops from the high about $153. It's also testing around a Fibonacci retracement approximately 61.8% of the drop from the $151-area secondary high. (That exact level would be more around $148, which is where it probed during the day Friday (can be seen in the /ZB_F bond futures) before settling back down by the end of the day.) If the 61.8% retrace to the $153-area high is needed, that would be $149.02 and mark the upper limit of a Fibonacci high-probability reversal zone. The weekly chart shows the H&S potential, and the monthly chart gives perspective on the width of the multi-decade uptrend channel that we can probably say is coming to an end.

One comment on my monthly $USB chart - there is a typo, the high which tested the Fibonacci $150 projection was the 1.382 extension. Fibonacci chartists will recognize that 1.382 either spelled the high, or if exceeded, then $160 becomes possible as the 1.618 extension. If the long bond doesn't merely turn this into a right-shoulder retracement of the high - or at worst, make a double top for the $150 projection - then bond traders should discard skepticism and turn bullish for a screeching high around $160. In that case, the P&F chart (below) would also register a resumption of the long uptrend.

Bottom line - the more logical view is that the US long bond has topped out. That makes this retrace - which I predicted in tweets recently, especially once it crossed back above $144 - merely a secondary high that will roll over sooner or later. When it does, it'll probably look and feel like a flash crash. The H&S pattern normally has a fast move that would target $USB to the low $130's. (There's even a potential gap fill area at $127 $USB, and we'd also be looking for a reaction whenever price touches the bottom of the monthly chart's trend channel.). The H&S target for TLT would take it to the $102 area. The caveats are that the H&S right shoulder could need more time and price (even retesting closer to the high for a "double top", although $149.02 should cap the retrace) before a drop to and far below the neckline. The reward would be being positioned to avoid loss - indeed, to profit from - a big swoon ahead in bond prices, with corresponding rally in yields. Disclosure: initiating short position in TLT, started yesterday after $148 tagged in /ZB (US long-bond futures), expecting to accumulate more TLT short, and/or TBT (and/or /ZB short) on confirmation of right shoulder formation.

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