I think we can get right to the charts here.
This is TLT (20+ year bond fund). Last year Treasuries performed spectacularly, this year not so much. While I won't go in to the details, it is one of the symptoms/signs of a carry trade unwind. The original trade idea is based on the concept of a channel user, if you have read the two "Understanding the head fake" posts linked at the right side of the members site, you understand how Technical traders look at this chart and how smart money uses that predictability against them which creates some great opportunities for us to enter trades at low cost/low risk and good timing. Here's the original trade idea in case you want to catch up with the broad concepts and reasons why TLT /Treasuries popped up on the radar,
Trade Idea: Long Bonds / TLT
A closer look reveals the first partial entry (50%) long TLT (which at the time was meant to be a longer expiration call, but I couldn't get the order through so I used TLT's inverse ETF TBT (2x short treasury bond fund) and shorted that. essentially creating a 2x long TLT position as I prefer leverage on the trade. That partial position was on May 7th (white arrow) and he same date as the post linked above.
The reason it was entered as a partial position is because I didn't have strong evidence that it would pullback and create a larger base, but that would be what I would expect so I decided to go with a half size position and if we got a pullback to create a larger base, I'd add the second half of the position then. This is not the same as dollar cost averaging to get out of a losing trade by throwing good money after bad, this is a phased in entry that was incorporated in to the risk management plan BEFORE any trade was put on.
We did get signs of a pullback the very next day on a gap up in which I could have closed the short TBT position at a gain and if it had been options with time decay I may have taken the gain and waited for the second entry I suspected we'd see. However being the drawdown on a 2x leveraged ETF was not anything I was too worried about, I decided o just let it sit as it is meant to be a longer term swing position (counter trend bounce/rally).
Next as it came down and showed positive 3C divergences in to the pullback (3C accumulation) which is EXACTLY what we need to look for and any additional trade is absolutely contingent on that occurring, an area of support developed and I took a calculated risk looking for a head fake move/stop run below support (yellow arrow) with the same 3C accumulation as stops were hit and would enter the second half at that time using call options. Instead TLT jumped 2% the next day and hit resistance. Again, I don't chase trades and by the afternoon there were already signals that TLT would pullback near term offering a better entry. Whether that entry is at the original head fake area below support or is in the current gap fill area is the next thing to determine before entering the second half of the position. Here's the update from Friday explaining what we would be looking for and why we were not chasing Friday's gains,
TLT Position Management / Trade Set-up
This is a longer term 30 min TLT chart showing the 3C distribution (red) that sent TLT below its long term trend line and the recent 3C positive divergence in the area confirming our expectation of a counter trend move using the concepts of technical analysis against technical traders as they are very predictable in their reaction
(the same as they were taught decades ago, but the market has changed since).
This is a 5 min TLT chart showing the area I had took a calculated risk by waiting for a stop run below support (yellow area), instead it moved higher and I decided to wait and by Friday afternoon the expected pullback from Friday's strength was signaling on the charts already,
thus the gap down today.
As I showed this morning as well, 30 year Treasury Futures were giving the same pullback signal .
Now we are getting in to the more detailed, 2 min intraday chart. Again the base area to the left with positive divergences (white) at #1 and the calculated risk of looking for a head fake move/stop run as the probabilities are high at #2 (yellow arrow down). #3 was the move I was not going to chase and again by Friday afternoon at #4 there were already clear signals that we's get a better entry as 3C was signaling a pullback off Friday's +2% move.
Now we have the first signs of a positive divergence in TLT,
this is ALWAYS what I'm looking for in any pullback trade as confirmation that the pullback is being accumulated. This provides us the evidence/probabilities BEFORE we enter/add to the position.
I still can't say if the entry point will be in this area (a gap fill) or if it is lower toward the bottom of the base as initially expected.
What we need to watch from here is the price trend. Does it move more to the downside? Or does it move more sideways in a "U" shape? How much stronger do the 3C divergences get at either scenario? This will tell us where we have the highest probability entry and timing of that entry as we have patiently waited since May 7th.
Again I suspect that the $USD will have a lot to do with the movement in Treasuries as well as the other major asset classes such as equities, gold, oil, etc.
That being said, I also want to keep an eye on the $USD and look for a breakout above its recent "W" base as that will or should accelerate the timing of an upside/counter trend rally in Treasuries/TLT.
The $USD is sitting right below its counter-trend base's resistance trend line.
5 min $USDX chart with "W" base/positive divergence and price just below the base's resistance/breakout trend line.
I suspect quite a few assets are going to move beyond treasuries so this might be an interesting one to keep an eye on or set some price alerts for a $USD breakout.
So far patience has paid off in the TLT position. At the end we'll reassess the entire position and position management.
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