Bond Rally / Swing

*For some reason I wasn't able to get the tracking portfolio to recognize TLT Calls or any TLT options so I went with the best thing I could do at the time which was short TBT (TBT is the inverse of TLT with 2x leverage so in shorting it, I essentially created a fairly liquid 2x long TLT position).

There has been a lot going on in the bond space, especially German Bunds which nearly moved out of reach of the ECB's QE, the volatility has been staggering.

However even the most cursory examination of a bond chart tells you something significant has changed. The popular thinking is QE is over and rate hikes, but remember that bonds are the object of carry trade proceed purchases so when a carry trade unwinds, guess which asset class falls?

Either way, for now we have a short term oversold condition and a head fake move about to be pulled on traders that are entering on the most predictable basics of Technical analysis, a long term trendily break. This brings the shorts in nice and thick, a perfect time to run a volatility shakeout. For more on the concept, see this article about the 3 places I WILL short a H&S top and the 1 place I WON'T, it might surprise you as it is essentially the opposite of what Technical Analysis has taught for more than 5 decades (making technical traders' actions very predictable and easy to use against them).

THIS IS AN EXCERPT ABOUT THE CONCEPT OF VOLATILITY SHAKEOUTS APPLIED TO ONE OF OUR CORE SHORT POSITION, HLF (HerbaLife). If you are already familiar with our concept, just skip down below the next chart to get to the TLT/Bonds charts.

"This is the H&S top in HLF and the 3 places I'll short it, 1) at the top of the head which is difficult, 2) at the top of the right shoulder. I will NOT short a H&S on the initial break of the neckline as TA teaches, but rather wait for the volatility shakeout of new shorts who just entered at area #3 back above the neckline and this is an example of the increased volatility we see as a top transitions to a downtrend. We entered HLF on the biggest day up in its history, over a +25% gain on the day, but not just because of the gain, but because the charts told us to even before the move up started, that was just a bonus, although an emotionally difficult one to short in to."

TLT-Treasuries

This is the daily chart of TLT as posted in Trade Idea: Long Bonds / TLT.

Note the clean trend through most of 2014 and as usual, the "seemingly" bullish increased ROC above the trend line. This is almost always a red flag telling you the trend is about to change whether it occurs on a daily chart like this or a 30 minute chart. One of the finer examples of this concept can be found on a gold chart (GLD) around September of 2011. You can draw a simple trendline from November 2008 or you can use a 150 day moving average. Either way you'll see Gold peel away from its long-term trend.

Many of you who were with me back then may recall a certain hedge fund manager with a blog site who asked for my Gold analysis and for all intents and purposes essentially laughed in my face as he was a diehard goldbug. My analysis was that gold was topping and would enter either an intermediate or primary downtrend as it did. The first warning sign what is the increased upside rate of change in price peeling away from the long-term trend just as you see in TLT above.

Late last year we also saw negative divergences that no longer confirmed the uptrend which had been confirming for almost a year. Since then we have seen Bonds make a lower high in the lower low which is the definition of a downtrend. Note the increased volume as TLT breaks below it's long term trendline.

This is a closer view at the daily chart of TLT. Once again you can see short-term capitulation or a selling event at the march lows and more recently on the break of the long-term trend line. The price and volume action alone are good cause for suspecting a countertrend bounce.

The long term one day 3C chart shows a strong positive divergence at a four month, Stage one base. Just before the move to stage 2 mark up, if you look closely you will see a head fake/ stop run at the yellow arrow. Once again this concept works with any asset, in any time frame, with any trading style. This is one of the best price-based timing indications of a trend change.

#2 shows stage to mark up with 3C confirmation making higher highs with price at the green arrow. Stage III was seen on hourly and multi hour charts as the long term, stronger daily chart is slower to give signals. I've also noted the increased rate of change to the upside just before the lateral top formed.

This is our custom DeMark inspired buy/ sell indicator giving it's first buy signal in green at the right side of the chart.

Our customX-Over screen shows all three indications giving a long signal at the white boxes with trend confirmation at the green arrow and a recent sell/ sell short Signal at the three red boxes. This system avoids the whipsaws and false signals that plague moving average crossover systems. There's also an entire trade management strategy that goes with the screen.

Our custom Trend Channel held the entire trend with a close call at Q3 2014, but it did not close below the channel. Both breaks above the channel are the same concept as the peeling away from the long-term trend and are red flags that a training change is near. There is a confirmed stop at the red arrow. You will never catch the top using this system, But you will catch the meat of the trend.

The 60 minute chart shows one of the lower lower lows and lour highs and 3C confirmation of the trend. Let me be clear, I believe treasuries have entered a new phase or trend and I would expect to see them make it lower low, however the trade we are looking at is a shorter term swing trade, typically with a strong volatility as shorts need to be emotionally squeezed into covering which makes this a strong Long swing trade.

On the 30 minute chart you can see the beginning of a positive divergence.

The five minute chart, much like our market averages has a strong leading positive divergence. Unlike the normal inverse correlation between bonds and equities, they have been trading together as of recent which I believe it is a symptom of the closing of the carry trade.

An unusual correlation between Bonds (green) and the SPY (red) moving together rather than their normal inverse correlation.

I do find it interesting that we have signals for a market bounce at the same time we are getting signals for a bounce in treasuries, considering the recent correlation on the chart above.

Futures

This is the 30 year treasury future showing a negative divergence and trend lower with 3C confirmation, which has recently turned into a positive divergence. I do believe there is a strong possibility that Bonds pullback toward the recent lows and form a stronger "W" base. If this is the case, I would likely add to the bond long, swing trade.

This one minute chart of 30 year bond futures shows a negative divergence intraday much like the market today, suggesting the near term pull back mentioned above which would create an excellent trade entry at better prices and lower risk.

This is the 15 minute chart of 10 year treasury futures. I don't believe a bounce is limited to Long end Bonds such as those represented by TLT. I believe we will see a general bounce across the entire treasury complex.

I will be setting price alerts for a move toward recent lows so we can take a look at price action on a potential pullback for an add-to or new Long position.