Support Holds In The Bonds (TLT)

On October 15th, I posted about a very significant level I was watching in the bond market for TLT. If you recall I was focused on the 93.50 area which I considered to be a major support zone and as you can see in the above chart the bond market has rallied off of this level. The actual low came in at 93.55 on Tuesday.

If any of you bought the bonds earlier this week, I would use the rising channel line as a trailing stop. A close below the channel would negate the bullish outlook.

2 Month Cycle Of Lows In The Bond Market

It would have been nice if I posted this chart for all of you before Friday but I totally forgot about it.

Above is a daily chart of the 30 year bond. What's interesting about the above chart is that there is a very accurate cycle of lows that occurs every 2 months. All of those vertical lines are exactly the same distance apart and as you can see big rallies tend to take place around those lines. Also notice the stochastic oscillator confirms most of the lows by moving below the buy line and then turning back up.

Based on the above chart, my guess is that the bond market will make new highs for the year. Lets keep an eye on this cycle and watch for the next cyclical low which is due around late April.

Stocks Continue To Move Lower

Today was another bad day for stocks as the dow moved lower by 238 points to close at 12,589. You'll notice in the above chart that all 3 indices have broken their most recent support levels and the dow posted its lowest close since last April.

Below is a ratio chart of the S&P vs Bonds. When the ratio line is rising it means stocks are doing better than bonds, when the ratio line is falling it means bonds are doing better than stocks.

What I find interesting about this chart is that a major trendline which was touched many times has been clearly broken. According to the chart below, Bonds should now be a better investment than stocks.

What's Next For The Bond Market

Back on June 14th, I posted the above chart and said that the bonds should put in a bottom based on the relationship between the dollar and interest rates. As you can see in the chart above, June 14th was the bottom in the bond market and we have been moving higher since then.

If we take a look at the chart now, Bonds should continue to rally going into early August where they are expected to put in a high and then sell off. On a seasonal basis bonds due tend to rally after July going into late fall, but I'm going to put more weight on what the above chart is telling me and I will look for the bond market to trend lower after early August.

Keep in mind these intermarket relationships can and do fall apart that is why it is important to use other technical tools to confirm what the above chart is forecasting. For example when early August comes, if the bond market triggers a bearish moving average crossover signal to short, I would take that signal because it coincides with what the above intermarket relationship is forecasting...As always, we'll see what happens.

My View On The Bond Market

The above chart is a 2 year daily chart of the 30 year bond (gold bars) and in red is the U.S. Dollar which is offset 35 trading days into the future.
What I am trying to show in the above chart is that the U.S. Dollar has been leading the bond market by about 35 trading days.

As you can see the correlation between the two markets has been very accurate in terms of direction and turning points. Each of these turns in the bond market could have been anticipated 35 days in advance just by look at what the dollar is doing.

If you look at what this chat is telling us now, you will see the dollar (red line) is moving higher which means the bond market should move higher as well. If this relationship continues to hold up, bonds can be expected to rally at least into August.



Above is a 12 year monthly chart of the 30 year bond. I've noticed that the bond market tends to rally around July going into December. In fact, this has happened 10 of the last 12 years. I placed blue arrows every time the bond market rallied after June/July.. The two red arrows are the two times that the bond market did not rally during this time of year.

Based on the above two charts, I think we will begin to see the bond market stabilize for a few months and maybe even rally a bit going into the fall.

Bond/S&P Ratio: Is The Downtrend Broken?

Money has been moving into bonds and leaving stocks over the last few days as can be seen in the above 2 year chart of Bonds vs S&P ratio. This ratio has been in a downtrend since May of 2005 which means that bonds have been under performing stocks. The ratio line now appears to be breaking this downtrend which would mean bonds will now outperform stocks. This is a good chart to keep an eye on and I'll update it in the coming weeks.

Are Yields Ready To Move Higher?

Looking at the above chart of the 10 year treasury note yield, it appears to me that we may have seen a short term bottom.

The 10 year yield had a nice advance from December to January and has now retraced 50% of that move. Yields showed some strength today bouncing off the 50% level.

If you look at the seasonal for Bonds, you can see that bonds tend to sell off this time of year establishing a low in April or May. Since yields move inversely to bonds, that means seasonally yields could move higher over the next month or so.