Treasuries / TLT Trade

Over the past several weeks it has become a very big issue that treasuries and equities are trading together, this is 180 degree opposite of the normal correlation. Treasuries/Bonds are seen as a "Flight to Safety" trade, a way to preserve capital, not an especially great way to make capital, but when the market is moving down or expected to move down, we often will see a flight to safety trade and vice versa when there's a risk on sentiment in equities (Treasuries are sold and the money goes in to equities). This is especially true for large funds, long only Mutuals are a big buyer of safe haven assets.

It seems strange to a lot of people/pundits and the argument is one is right, one is wrong, they can't both be right as they are two opposing ideas. Without any specific knowledge of a market, if I had to choose which I thought was right, I'd go with Treasuries every time, it's just a bigger market.

However, I don't quite see the disconnect in the same light. We were expecting the SPX to make a head fake move above the range, the bear flag from mid-May wasn't an accident, there was accumulation in that bear flag, it was put there for a reason and as we suspected, a Crazy Ivan shakeout caused traders to believe the bear flag was doing as it was supposed to and make a new leg lower, that was the bear trap which created the short squeeze which lifted the SPX above the range. As you know, I don't see any of this as "accidental" or "random", why else would there be accumulation in a bearish price pattern that technical traders are VERY familiar with? 

If we follow that line of logic and we already know first from 3C that the move up/short squeeze was distributed, we got extra confirmation last night from BAC's report on net sellers (Institutional) and net buyers (Retail) which is the exact reason a head fake move is effected, retail will buy the breakout and that's when distribution in 3C started as well as BAC's charts of Institutional selling on the week and retail buying, again, if you read our "Understanding the Head Fake Move", you'll see this is the EXACT reason these moves are run, to get retail to do something like buy, but they need to push price to an area where retail will do that and in this case, a breakout above a multi-month range did the trick as we expected when we saw the mid-May bear flag.

So if Wall St. has put this little move together as I feel 98% confident they did (as we were able to predict it ahead of time), then why wouldn't they buy Treasuries if they were bearish on stocks (and we know they were bearish on stocks because they were distributing them/short selling as 3C showed us and as BACs report for last week showed us)? 

For a long time I've felt TLT (20+ year Treasury) would make for a great long term long position, but only if it pulled back to the $102 area. However more recently I've been questioning this logic as the F_E_D who is the real buyer of Treasuries as China gave out is backing out of QE3, there obviously won't be a QE4 which leaves the question, "Who will be the buyer of Treasuries?" It is true the
US is slated to reduce their treasury offerings so there won't be as much supply to soak up, the only buyer of consequence I can think of is Institutional money moving to a safe haven asset.

In any case, I don't have the answer to this question, but it's one I'm looking for as I feel it's very important to understand what the "new normal" will be once the F_E_D has largely removed accommodative policy.

Some of the Treasury buying with the market I think is random, here's what I mean.

This 5-day chart of TLT is a real H&S top, I checked volume and it confirms. According to the standard Price pattern implied target, the downside expectation would have been $95 (white trendline), this is not an exact science, just a rough idea of what level the price pattern (H&S) is likely to move to. There's no doubt that support , a base/accumulation formed at the $102 area (red horizontal trendline) and interestingly, there's a VERY defined channel that's better seen on a 1-day chart.

This channel in TLT is pretty darn symmetrical, it doesn't look like the work of random price action. It's kind of easy to see how Treasuries could move up at the same time as equities with a channel like this, but there's still a reason Treasuries are moving u in the channel, it's not random.

If support holds and it looks like it will, TLT would likely make a nice long here if you can get enough leverage on it, maybe TBT short of calls if there's enough liquidity.

 This is the SPY in red vs TLT in green, you can see the move up together that has pundits up in arms. However recent weakness in TLT the last few days doesn't look to be an end of that strange correlation, but rather a simple pullback inside a defined channel as it has done several times before.

 This is the weekly 3C chart shows the H&S top  as well as the base area around $102, the base's smaller size has been one of the reasons I've felt TLT has a pretty high probability of pulling back to $102. If it does pullback, we'll see either accumulation of the pullback or not, if so we can step in to the long position, if not we just move on. The overall price pattern from the H&S to present looks like this is a counter trend rally in TLT and a pullback to $102 to form a larger base makes perfect sense.

 This is that channel on a 15 min 3C chart, there is some recent weakness developing in the channel, but I'd expect to see some kind of channel buster before a significant move, this would be VERY tradable and with a channel that defined, a Channel Buster looks to be the highest probability.

This is just a guess, but I'd guess we bounce off support here, make an upside run and break through the top of the channel, Channel Buster. That break out is actually a head fake move and creates a fast, strong move down that moves below the bottom of the channel, very tradable and that may start us on the move to $102.

 This 5 min chart shows a VERY clear negative divegrence at the top of the channel and a positive at the bottom, again, I don't think these divergences at the channel's resistance and support are accidental or random.

The 1 min chart shows the same thing, so I'm guessing that TLT will make for a decent long here, a stop can be set a bit under the channel, I prefer a wider stop in exchange for fewer shares initially. On a Channel Buster (short), I think the position size can be increased as this is a very high probability trade set up.

As for the correlation, we'll just have to see. The 5 year and 10-year Treasury futures (3C charts) look better than the long end (30 year), so perhaps there's going to be some divergence between duration of T's.

In any case, if the 5/10 years move up, that means yields move down, that's not a good thing for the market (one of our leading indicators and one of my favorite as Yields move opposite price of T's and tend to pull equities toward Yields like a magnet, so a bounce here in Treasuries would send Yields lower and pull on the market (lower).