Today I received notice that TLT had triggered a new Intermediate-Term Trend Model (ITTM) Neutral signal. I decided to take a look at $TYX to see if yields were lining up with the action on TLT. Of course the relationship between TLT and $TYX is inverse, so a bearish TLT chart should yield (no pun intended) a 30-Yr Treasury Yield chart that is bullish. It did, only in a slightly different way than I expected.
The new ITTM Neutral signal was generated when the 20-EMA crossed below the 50-EMA. It was not a SELL signal because the 50-EMA is above the 200-EMA which implies TLT is in a bull market configuration. We prefer to go Neutral on these negative crossovers above the 200-EMA. Bull market rules still apply when the 50-EMA is greater than the 200-EMA. However, the chart is quite bearish. Carl pointed out recently the double-top formation. The pattern would become official if it were to execute. The neckline of the double-top is along the October low. The expectation, especially after this Neutral signal, is a breakdown below that neckline. The big risk here is that the minimum downside target would be just above the March low. I calculated the target by measuring the height of the double-top pattern and then subtracting it from the neckline. That's a hefty fall if it executes.
Let's look at the Yield chart. We would expect to see a bullish chart given the inverse relationship between bonds and yields. Indeed the chart is very bullish. Instead of a double-bottom to replicate the double-top on the TLT chart, we have a reverse head and shoulders which is also a bullish pattern. This pattern will become official if we see a break above the neckline. Notice that $TYX triggered an ITTM BUY signal earlier this week. The PMO is healthy and not at all overbought.
To shore up this discussion a review of the weekly chart for TLT shows a very bearish long-term head and shoulders. This is serious business. If we measure the height of this pattern from head to neckline, it adds up to a differential of about $25. That would mean on the conservative side, the minimum downside target would be around $90 at the 2013 lows. Notice that we have an IT PMO SELL signal in play right now too. This signal will go final tomorrow if the negative crossover is still there.
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