09.03.2022
This article examines the chart of TLT and asks the question, "Is now a good time to establish a short position?"
Key Takeaways
The monthly chart of TLT shows, in the great Martin Pring’s nomenclature, a “mega-oversold” condition in momentum. This argues that the long-term trend has shifted to down. It also argues that we might be due some mean reversion over the coming months, either through price, time, or both.
This message of a potential mean reversion is echoed by the weekly chart.
Despite the message from the monthly and weekly charts, the daily chart does offer a reasonable reward to risk if we are interested in taking a small starter position.
Introduction
During the year 1976, the band AC/DC released its first album. Titled High Voltage, its fifth track is named for the explosive compound TNT. During the year 2002, the company iShares released its Exchange Traded Fund (ETF) TLT. TLT is an investable product made up of US Treasury Bonds with maturities of 20 years or more.
Without fail, every time I hear TLT mentioned or see a chart, the chorus to TNT plays, courtesy of my mind, right on cue. The memorable three power chords are strummed as the letters TNT are sung. For any musicians in the audience, the tune I always hear are the first 3 scale degrees of a minor pentatonic scale– 4, b3, 1 –played in descending order. The lyrics are:
'Cause I'm TNT, I'm dynamite
TNT, and I'll win the fight
TNT, I'm a power load
TNT, watch me explode
These lyrics serve as a reminder to control risk and fully plan our trades/positions. As the lyrics suggest, we do want to win. The important part is making sure any explosion is in the direction of our intended target.
The Charts
For context, let’s take a look at TLT’s monthly chart. The chart below shows the ETF’s entire trading history back to 2002. Please keep in mind that the newest candle is only built from 2 trading days this month. Some things that stand out:
The recent decline from the March 2020 Covid spike is the longest downtrend in duration and percentage decline in TLT’s history. Price has fallen almost 40% over 27 months.
Price is now below the 2018 low and is testing the 2012 low of $109.69.
There are 2 other important levels. $101.17 is the 2013 low and $97.66 served as resistance from 2003 through 2011.
Momentum is very strong to the downside. This incredible surge of downside momentum, called mega-oversold in Martin Pring’s vernacular, generally kicks off an extended downtrend. I would think cautiously though as momentum might be due for some mean reversion through price and/or through time. If you want to learn more about momentum, I highly recommend Martin's book Market Momentum.
TLT Monthly. Click to enlarge.
Moving from the ocean’s currents, the monthly chart, to the ocean’s waves, the weekly chart, a few things standout:
Price has closed, twice now, below $111.90 the 2018 low.
Price is below the 2018 low, but it is clear buyers are defending the 2012 low of $109.69.
The volume has stabilized and reduced during the last 2+ months. This validates price’s trading range and the current equilibrium between buying and selling pressure, at least for now.
While not yet getting any mean reversion in momentum on the monthly chart, we are already seeing it on the weekly chart. The trendline suggests that the mean reversion might continue through time and/or price.
TLT Weekly. Click to enlarge.
Finally, after considering the ocean’s currents and waves, we now turn to the ripples formed by the daily price action.
After momentum’s warning, courtesy of a 2-month positive momentum divergence, price tested the 2012 low. Buyers stepped in, and price has been rangebound since.
Most recently we have a falling window, aka a gap down. The gap down printed a doji and then a larger bodied white candle closed back above the 2018 low. The candle formation is not textbook. It’s not quite a morning star or piercing line. It will either move higher to test the gap as resistance, continue sideways, break decisively lower, or even gap up and form an island reversal.
TLT Daily. Click to enlarge.
The next daily chart has a few indicators so we can consider additional evidence:
On most recent swing down, from the top of the range to where we are now, volume really lightened up compared to the volume from March, April, early May, and June’s test of the 2012 low. The fact that the volume is lighter now, even as price tests the 2012 low again, implies there is less buying interest. This might speak to market participants' interests, or they might just be away from their desks ahead of the 3-day holiday weekend.
The middle indicator shows Wilder’s 10-day average true range. It has not confirmed the breakdown with an expansion of volatility.
The lowest indicator shows Wilder’s ADX and DI lines. The green ADX line has just crossed above the blue DI+ line, signaling we should be open to price's directional movement increasing and start thinking about trend trading tactics. Remember, this indicator is directionally agnostic. The ADX rises to show directional movement for both upside and downside price action. The red DI- line is above, and expanding away from, the blue DI+ line. This also speaks to the possibility of increased directional movement to the downside.
TLT Daily. Click to enlarge.
Conclusion
With price closing this week below the 2018 low, several technicians have stepped forward and declared, “It’s simple. Below the 2018 low, we have to be short.” While keeping it simple is ideal, we also want to make sure the chart is showing signs that the probabilities are in our favor both directionally and on our timeframe.
Before I outline the conclusion, I would like to address a few risks. As a subscriber to Martin Pring’s Intermarket Review, I know that last month, August 2022, he added the ETFs IEF and ISTB as long positions. IEF is the 7 to 10 year treasury bond ETF, and ISTB is the 1 to 5 year treasury bond ETF. These decisions, I believe, were based more on the business cycle and economic indicators than their technical price setups. Also, these ETFs have shorter maturities than TLT.
What really gives me pause is this: On this week’s Trendlines Over Headlines show the incredible John Roque of 22V Research, formally of Soros Fund Management and Lehman Brothers, said that his colleagues are interested and buying here. They do not want to short bonds. He says this around 36 minutes and 15 seconds. This is said during his comments on the 10-year treasury yield. This is more in line with IEF than TLT. The point is, when big money is buying we do not want to go short. We know there is usually a disconnect between what people say and what people do, so we must defer to price and push aside narratives.
The monthly chart tells us the trend is firmly down. Momentum agrees but does argue for continued mean reversion through price and/or time. During 2021, price spent the final 10 months of the year in a counter-trend rally. So far in 2022, the sideways move has only been 3 months.
The weekly chart tells us price is rangebound. Momentum is strong to the downside, though has some room for continued mean reversion though price and/or time. If price breaks below the 2012 low, then we have room to run down and test $101.17 which was the 2013 low.If price breaks decisively higher, $126 is around the 38.2% retracement of the previous price swing from $155 to where we are now.
The daily chart zooms in on the 4-month long battleground between the 2012 low and the top of the range around $119.
Price has not decisively broken below or above the range.
Momentum argues for trend continuation lower.
The ADX speaks to an increasing likelihood of the downside action continuing.
From a purely technical perspective, the dominant thesis here is trend continuation over the long-term. The weekly chart shows price is range bound and volume supports that buying and selling pressure are about equal for now. So do I want to initiate a short here. Not really. With momentum’s trend line some distance above the oscillator and with price at the bottom if its range, for a price target of $101 the risk up to $120 is too great. If price moves higher in the range and offers a better reward to risk, I would revisit the short TLT trade from the weekly perspective.
Looking at the daily however, with the gap still unfilled, a small test position might be justified so we don’t miss the move lower should it happen right away. There is nothing wrong with taking a small starter position here with the idea of adding should price decisively break below the 2012 low of $109.69. We would want to see both an expansion in volume and volatility confirming the breakdown.
The Trade Setup
Entry: $110.22
Downside target: $101.70. -$9.05.
Stop: $113.35. +3.13.
Reward to risk: 2.89:1
ATR10: 1.77. Stop is 1.76x ATR.
TLT Daily. Click to enlarge.
As always, thank you for reading. This article is for educational and informational purposes only. Read our full disclaimer here. Please reach out with any feedback or comments. I would love to know if you agree, disagree, or don't care at all. Louis@eastcoastcharts.com
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