Bonds Are in A Very Dangerous Place (TLT)
Hi friends! Today, we're going to switch gears and look at an area of the US market that I am very interested in — bonds. In front of you, I have the daily chart for the 20 year treasury bonds, via the (TLT) ETF. My long-time followers know that I've been bearish on bonds for quite some time, so let's see how things have been developing.
Looking at the chart, you can see that an enormous head and shoulders formation was printed, between 2014 and 2018. In September, we broke down below the neckline of the head and shoulders pattern, but have since rallied back above it. Now, this is a move that I have been watching very closely. TLT is clearly inside of a downtrend channel at the moment (in black.) If the TLT can break above the top of the black downtrend channel, then we are likely to see a run higher in the bond market. However, a failure here is likely to send TLT back to the bottom of the black downtrend channel and potentially lower.
Looking at the height of the head and shoulders pattern, and subtracting that height from the apparent breakdown area, we can see that it has the potential to produce a fall to about $90, well below the bottom of the ascending broadening wedge (in blue.)
Speaking of the ascending broadening wedge, that is a bearish formation that produces powerful breakdowns, usually equivalent to the widest traded section of the formation. Applying that logic to the current price range, projects a potential fall into the 50s, for the TLT. However, there are some interesting things to point out about this chart. For instance, the entire rise has been a series of head and shoulders patterns. The head and shoulders pattern that was formed during the great recession never broke down below the neckline (red dashed trendline,) because the Fed stepped in with QE, rescuing the markets — or, "kicking the can down the road," as some might say. Regardless, for over a decade this chart has been rising in a series of bearish formations, all while enclosed in an enormous bearish formation, the ascending broadening wedge. With that in mind, it's tricky to predict how and when this thing will really break down. I've been short since the high of 2017, but this fall is very long and drawn out. Eventually, I believe it will rapidly accelerate, but that is not happening at the moment.
Fundamentally, bonds are in a very dangerous place, because (put simply) banks and nations around the world are over-leveraged to US debt. If a global economic crisis kicks off (likely ushered in by the economic stress that is coming from Europe) we could see shock-waves sent throughout the global economy that really trigger an acceleration in a rupturing of the bond bubble. Particularly if countries like China and Japan begin to sell US treasuries to fend off economic chaos in thier homelands. The US bond market is in a very dangerous place, both technically and fundamentally. In the likely event that we have another recession (I say "likely" because of an inversion of the yield curve, EPS contraction, trade wars, EU chaos, and a host of other headwinds) bonds are likely to collapse like never before.
I'm the master of the charts, the professor, the legend, the king, and I go by the name of Magic! Au revoir.
***This information is not a recommendation to buy or sell. It is to be used for educational purposes only.***
-JD-
Looking at the chart, you can see that an enormous head and shoulders formation was printed, between 2014 and 2018. In September, we broke down below the neckline of the head and shoulders pattern, but have since rallied back above it. Now, this is a move that I have been watching very closely. TLT is clearly inside of a downtrend channel at the moment (in black.) If the TLT can break above the top of the black downtrend channel, then we are likely to see a run higher in the bond market. However, a failure here is likely to send TLT back to the bottom of the black downtrend channel and potentially lower.
Looking at the height of the head and shoulders pattern, and subtracting that height from the apparent breakdown area, we can see that it has the potential to produce a fall to about $90, well below the bottom of the ascending broadening wedge (in blue.)
Speaking of the ascending broadening wedge, that is a bearish formation that produces powerful breakdowns, usually equivalent to the widest traded section of the formation. Applying that logic to the current price range, projects a potential fall into the 50s, for the TLT. However, there are some interesting things to point out about this chart. For instance, the entire rise has been a series of head and shoulders patterns. The head and shoulders pattern that was formed during the great recession never broke down below the neckline (red dashed trendline,) because the Fed stepped in with QE, rescuing the markets — or, "kicking the can down the road," as some might say. Regardless, for over a decade this chart has been rising in a series of bearish formations, all while enclosed in an enormous bearish formation, the ascending broadening wedge. With that in mind, it's tricky to predict how and when this thing will really break down. I've been short since the high of 2017, but this fall is very long and drawn out. Eventually, I believe it will rapidly accelerate, but that is not happening at the moment.
Fundamentally, bonds are in a very dangerous place, because (put simply) banks and nations around the world are over-leveraged to US debt. If a global economic crisis kicks off (likely ushered in by the economic stress that is coming from Europe) we could see shock-waves sent throughout the global economy that really trigger an acceleration in a rupturing of the bond bubble. Particularly if countries like China and Japan begin to sell US treasuries to fend off economic chaos in thier homelands. The US bond market is in a very dangerous place, both technically and fundamentally. In the likely event that we have another recession (I say "likely" because of an inversion of the yield curve, EPS contraction, trade wars, EU chaos, and a host of other headwinds) bonds are likely to collapse like never before.
I'm the master of the charts, the professor, the legend, the king, and I go by the name of Magic! Au revoir.
***This information is not a recommendation to buy or sell. It is to be used for educational purposes only.***
-JD-