Saturday, July 2, 2016

End of the 35-year bond bull market as we know it?

*Update Tuesday, July 5:  I'd mentioned in this post that bonds could make another higher high today.  TLT already has. Check my Twitter feed @ChartLines for my updated trendlines on TLT hourly as it looks now about 10:00 am, and future updates as well.
Below is the rest of my Saturday post as originally written:
We may have just seen the end of the 35-year bull market in US Treasury bonds. While it could poke a slightly higher high on Tuesday, July 5, or even later this quarter, there's a good chance it's done, and a very good chance it's in the process of completing a very large crest to the long-term bond bull market. Some may perceive this as a sudden bursting of a bond bubble. While we can't rule that out, I think it's more likely we'll see bond prices pull back for a while (could play out over months without making a drastic lower low), then retest back toward this summer's levels.
I wish I knew to whom credit should be given
 for this great image.  Found it online and
couldn't see its creator.  It's a good one!
I'm sharing some charts in this post, which are based on my work charting bonds for several years by now.  Some of my work is based on Fibonacci calculations, and some using trendlines.  I also recommend an article I came across a few weeks ago, by Austin Galt, published at  I've done my chart and technical analysis on my own, and don't know Mr. Galt's work generally, but he provided in that article a great big-picture review and chart-based forecast for the top in US Treasury bonds prices.

Hourly chart of $TLT may have completed 5 waves up,
including a final thrust after a triangle.
Although next week's R2 level might still be tested.
The ETF most commonly associated with US Treasury long-term bonds is $TLT, which I'm showing for the hourly chart here.  It recently made a head-and-shoulders (H&S) pattern, dropped to the H&S target, then took off in a torrid rally as stocks dropped into Monday's (June 27) low.  Bonds and stocks don't always move inversely, so the potential for bond prices to fall and yields to rise doesn't work as a good predictor for where stock prices are heading from here.

But bond prices can have finished at least a small fifth wave into yesterday, July 1 (or next Tuesday, July 5).  With negative divergence on the hourly chart, and as you'll see in the daily, weekly and monthly charts below (look especially at the CCI (commodity channel indicator) and ROC (rate of change) indicators), bonds have been on watch for an important crest for literally months now.

Support for 30-yr bond is $166-169;
with even stronger support at $160-$163.
Daily chart of the 30-year bonds index $USB
(similar to the futures contract $ZB_f) shows
some negative divergence as it's been reaching
Fibonacci and inverse H&S targets.
The latest push up has taken long-term bonds up to a Fibonacci 1.382% extension of the prior monthly high-to-low range. The 1.382% extensions have previously provided the levels for the subsequent highs.  Also, the levels reached by the long term bonds the past week (and also 10-year notes $UST $ZN $IEF) have achieved inverse H&S (IHS) targets formed after exceeding the May high ($166 in $USB).

On a weekly chart of the 30-year US bonds index $USB, I drew trendlines about four years ago, and recently extended them.  Price actually jumped above the upper one; I'm guessing that may represent a blow-off into this important time window.  Notice that this also corresponds to the yearly "R2" resistance level for 2016, another reason to expect price to stall or crest and top out here.
When I did that work on this weekly chart to extend the trendlines, a few weeks ago, I also added the notes about the Fibonacci 1.382% and price targets focusing $170-$172.  It was somewhat challenging because prices had come down and many thought the top was in; but after prices exceeded the prior extension $160-$163, I knew the next extension to $170-$172 was on the way.  One way to help confirm bond prices turning down from this crest will be when USB goes back under $170.  After that, the $170-$172 zone will be important resistance that should hold for the long bond $USB.

The last two charts are monthly views of this 30-year bonds index $USB.  I'm thinking price will work its way down, possibly over several months, then come back up to retest near the high - but may not exceed the $170-$172 level that should be resistance by then. After all that occurs--possibly (early) next year--that's more likely to be the time when sharp drops in bond prices and a real uptrend in yields should occur. it will be interesting to see how financial markets shift, especially after the retest I described, once the trend change becomes apparent. After 35 years of declining bond rates, a prolonged period of rising rates could bring some inflation, and some consider a stronger dollar too. I won't try to get into predictions about that here, especially since higher rates can have a depressing effect on some assets like real estate that are typically financed with debt. But it is pretty easy to foresee troubling consequences for government debt--both the ability to issue new (and rollover) debt, and the need to allocate more taxpayer monies toward interest payments.

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