What started as a short post describing a potential, but dangerous, weekly inflection in the TLT chart has evolved into a much longer discussion around process and how I organize and view the basic information. As I wrote, I realized how difficult it is to describe process, particularly the more nuanced aspects. 40 years spent staring at literally millions of charts and focusing on rates and credit have internalized much of what I do. But I hope this at least provides you with a place to begin. I have ordered the steps, but the order isn't particularly important. And finally, there isn't a right or wrong process. What process is and what it accomplishes is different for everyone. What is important is that you have a process, particularly surrounding your risk and trade management, and that you implement it consistently.
Note also that there are different processes for different trend states. A market with bearish momentum that appears to have plenty of life remaining in its trend requires a different approach than one making a potential inflection. Finally, most markets only provide two to three good tradable inflections a year. TLT is showing many of the characteristics I monitor for in these inflections.
I like simple things. I prefer to find confluences of support and resistance and then to monitor for price volume behaviors around those confluences. This is how I go about it.
Background: Momentum and price trends in daily, weekly and monthly perspectives are clearly lower and the price volume relationships in the trend of higher degree (monthly) strongly suggest that rallies will prove counter trend. The three momentum trends pertinent to the analysis are covered in the “triple screen” section below.
Identify and organize the major chart elements:
Buying Climax and Failed Test: March 2020 produced a clear buying climax. The spike high, subsequent close near the low of the price spread and below the close of the prior weekly bar with volume at nearly 4X the average was unambiguous. Note that over the two week period the market roundtripped nearly 41 points or 23%. At the very least, this kind of volatility can be expected to exhaust the market.
The market then spent 21 weeks moving laterally. Two attempts to rally with no sign of expanding volume strongly suggested a lack of demand. In my view, the break below TR1 strongly suggested that the test of the buying climax had been completed.
Identify Horizontal Support and Resistance:
The market is framed by major support at 111.90 (Nov 2018 low) and major resistance 179.70 (March 2020 Covid high). What were significant supports at 133.19 and 155.12 are now strong resistance.
Price did violate the major support @ 111.90 but not to a meaningful degree and it certainly didn't post a weekly or monthly close below. PENDING A SUCCESSFUL TEST, I am tenatively viewing this as a weekly hold. It also demonstrates the danger of selling breakouts, particularly when the market has been trending for an extended period or the preceding move has been violent. Again, to be trusted, the recent low @ 108.12 needs to be tested. In lieu of a test, unequivocally bullish behaviors would need to develop. To this point, that has not happened.
Identify Dynamic Elements:
There are three dynamic elements in play. Price is pressing against the bottom of the large declining trend channel drawn across the 175.25 -155.12 highs with a parallel drawn from the 133.19 low. The supply or overbought line of the channel currently intersects price in the 148.00 area, but is constantly declining. You can think of the bottom of the channel as the oversold/demand line for price. It intersects in the 116.61 zone.
There is also a broken uptrend (LT1) that had defined the trend for the last decade. The clear break of the TL in April moved the long term trend from up to neutral. The broken uptrend should now act as resistance. It currently intersects price in the 121 1/2 area.
Of lesser interest is the steep downtrend drawn across the 155.12 and 142.33 highs. A break above would add confirmation of a short term trend change.
Characterize Volume:
Are the price/volume relationships bullish or bearish? Volume has been steadily rising/heavy on the B-C leg. This is consistent with a supply driven market. This increase in volume is particularly evident on the monthly chart. See the detailed volume breakdown below for a more in detailed look at the daily perspective chart.
Categorize the Momentum State:
Weekly perspective oscillators like MACD (shown) and moving average and volatility envelopes (not shown) are deeply oversold. I use deeply oversold/overbought conditions to help identify charts and time frames that should be monitored for bullish or bearish price behaviors and chart setups. I also use oscillators as a trend filter. But I rarely use them to generate actual buy or sell signals. Last weeks close nudged the weekly MACD oscillator onto an oversold buy signal. But, to be trusted the crossover MUST be coupled with bullish price behaviors.
Evaluate the most important Fibonacci objectives and retracements:
Fibonacci objectives generated from the 179 .70 - 133.19 - 155.12 sequence: Equality at 108.34, 1.38 @ 90.51 and 1.618 @ 79.49. The market found support at equality.
Fibonacci Resistance generated from the X - C & B - C declines: I prefer to look for clusters. The most likely resistance cluster falls in the 132-135 zone.
When it comes to Fib levels, I like to keep it simple. I hate to see charts with dozens of Fibs scattered about. In my opinion, it devalues the more important levels.
Examine the price/volume relationships in the trend of lower degree:
Volume Detail: The footprint of a subtle shift from supply driven to demand is evident. Two bars in particular, May 5 and June 13 (circled) drew my attention. It would have been easy to dismiss these two as supply, but on my charts I labeled them as demand. Both bars are large gap down days, but note that they closed well off the lows, in the upper portion of the periods range and on much higher than normal volume. Note also that volume pulled back on the decline from the May 27th high (rectangle). This reduction in volume represented a significant lessening in supply. In other words, selling was far less urgent than the selling that had characterized the earlier portions of the decline. Over the last few sessions signs of supply have developed but volume on the pullback has been modest compared to price spread.
Examine the perspectives of higher and lower degree:
Triple Screen: The chart of higher degree will help determine how aggressive trade positioning and risk management should be. The chart of lower degree is used for trade placement, tactical entries and stops.
Monthly: Trend of higher degree is clearly bearish and not oversold. Rallies in the weekly perspective will likely be corrective/countertrend as opposed to the start of a new long term trend. A large head and shoulder top is visible in this perspective that projects as low as 88.00. Volume (not shown) has been extremely heavy, confirming the trend, but perhaps being a bit on the exhaustive side. Against this backdrop rallies will have a tendency to fail early and surprises will tend to be bearish in nature. This suggests that positioning in shorter perspectives should be conservative and stops should be raised aggressively behind trades. Trade management should be generally conservative.
Daily and other: If the weekly chart supports positioning, move to daily and hourly perspectives to build trading and risk management plans.
Other Considerations:
Are there any seasonal tendencies in play? Bond prices have very strong seasonal tendencies, weak into the May - June time frame, stronger into the middle of September, and weak into the end of the year. TLT has entered a time of the year when bonds often transition from weakness to strength.
Are the related markets supportive? Industrially sensitive markets like copper and crude appear to have made significant inflections as the market’s attention shifts from inflation to recession. The same can be said for TIPS breakeven rates. On balance, the related markets are supportive.
Do the charts of other U.S. maturities and yield curves support the idea? 2s and 5s are testing strong yield resistance levels and momentum is threating to reverse, particularly in fives. Remember that the two year is very sensitive to the Fed, fives are a combination of market forces and Fed and Long rates (TLT is longer duration) are generally more responsive to the economy and inflation.
Is positioning or sentiment offsides? In rates, Commitment of Traders, options open interest, open interest data from futures, TIC data and fund flows are all fair game. When trading was my job, I monitored all of the above. Now, in retirement, not so much. Breadth, % of stocks above or below moving averages and VIX fall into this category.
Evaluate economic relationships that impact bonds: For example, are the slopes of the ISM and surprise indices consistent with the trade? With the ISM slope clearly negative, bonds are more likely to be bid. What are credit spreads doing? The widening in high yield and investment grade credit spreads is also supportive.
Do I have the sense that there are systemic issues building that might impact the trade? Systemic issues are typically bullish for bonds. While I see less potential for dislocation in this cycle, rate increases of this magnitude usually wreck someone.
Finally, I take a sanity check, am I falling prey to behavioral bias? Am I being dispassionate?
Reach a Conclusion and Design a Trade:
While monthly trends are unequivocally bearish, the market is testing a major support confluence generated by the combination of horizontal support, oversold channel and fibonocci levels. Weekly momentum oscillators are oversold and there are tentative signs of demand developing in the price volume relationships. Recent inflections lower in industrial commodities, TIPS breakevens, and energy are supportive and suggest a growing recession narrative. Bonds are entering a seasonally strong period of the year. While trends are clearly negative, the balance of the evidence suggests that conditions are conducive for a weekly perspective inflection/correction to develop. I will begin monitoring market behaviors in the daily and hourly perspective charts for opportunities to enter. It is likely that a rally into the third quarter will set up a very high percentage selling opportunity.
Design the trade:
For liability reasons the CMT Association precludes me from making direct recommendations. So, this is where I leave you hanging. My goal was to show you how I do the analytic steps leading up to designing a trade. But a few general thoughts:
Trade entry should be timed using the charts of lower perspective (daily and hourly). Remember, the recent low has yet to be tested, and the market is far away from a logical stop loss placement.
Since a long trade will be counter trend, strict attention to risk control and entry tactics will be required. Surprises are inevitably in the direction of the trend… plan accordingly.
The Fibonocci retracements and overhead resistance zones outlined above can be used to ascertain if a trade has a reasonable reward for the risk taken. Look for confluences of horizontal, dynamic and Fibonoci resistances to build objectives.
Which brings me to my final points in regard to process. I believe that simplicity leads to robustness. I consistently follow the same basic building blocks/process for all my trades, no matter the context or the market. Most importantly, most of the considerations described above are just details. Support, resistance, trend and the price volume relationships get you almost all the way there. I’m not going to pass a trade with a good risk reward because the seasonal is wrong or the trend higher degree isn’t supportive. Analysis paralysis is real. Decide what the most important elements are in your process of focus most of your attention there.
And finally, most of the topics and techniques covered above are part of the CMT Associations Chartered Market Technician’s curriculum.
Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
Note also that there are different processes for different trend states. A market with bearish momentum that appears to have plenty of life remaining in its trend requires a different approach than one making a potential inflection. Finally, most markets only provide two to three good tradable inflections a year. TLT is showing many of the characteristics I monitor for in these inflections.
I like simple things. I prefer to find confluences of support and resistance and then to monitor for price volume behaviors around those confluences. This is how I go about it.
Background: Momentum and price trends in daily, weekly and monthly perspectives are clearly lower and the price volume relationships in the trend of higher degree (monthly) strongly suggest that rallies will prove counter trend. The three momentum trends pertinent to the analysis are covered in the “triple screen” section below.
Identify and organize the major chart elements:
Buying Climax and Failed Test: March 2020 produced a clear buying climax. The spike high, subsequent close near the low of the price spread and below the close of the prior weekly bar with volume at nearly 4X the average was unambiguous. Note that over the two week period the market roundtripped nearly 41 points or 23%. At the very least, this kind of volatility can be expected to exhaust the market.
The market then spent 21 weeks moving laterally. Two attempts to rally with no sign of expanding volume strongly suggested a lack of demand. In my view, the break below TR1 strongly suggested that the test of the buying climax had been completed.
Identify Horizontal Support and Resistance:
The market is framed by major support at 111.90 (Nov 2018 low) and major resistance 179.70 (March 2020 Covid high). What were significant supports at 133.19 and 155.12 are now strong resistance.
Price did violate the major support @ 111.90 but not to a meaningful degree and it certainly didn't post a weekly or monthly close below. PENDING A SUCCESSFUL TEST, I am tenatively viewing this as a weekly hold. It also demonstrates the danger of selling breakouts, particularly when the market has been trending for an extended period or the preceding move has been violent. Again, to be trusted, the recent low @ 108.12 needs to be tested. In lieu of a test, unequivocally bullish behaviors would need to develop. To this point, that has not happened.
Identify Dynamic Elements:
There are three dynamic elements in play. Price is pressing against the bottom of the large declining trend channel drawn across the 175.25 -155.12 highs with a parallel drawn from the 133.19 low. The supply or overbought line of the channel currently intersects price in the 148.00 area, but is constantly declining. You can think of the bottom of the channel as the oversold/demand line for price. It intersects in the 116.61 zone.
There is also a broken uptrend (LT1) that had defined the trend for the last decade. The clear break of the TL in April moved the long term trend from up to neutral. The broken uptrend should now act as resistance. It currently intersects price in the 121 1/2 area.
Of lesser interest is the steep downtrend drawn across the 155.12 and 142.33 highs. A break above would add confirmation of a short term trend change.
Characterize Volume:
Are the price/volume relationships bullish or bearish? Volume has been steadily rising/heavy on the B-C leg. This is consistent with a supply driven market. This increase in volume is particularly evident on the monthly chart. See the detailed volume breakdown below for a more in detailed look at the daily perspective chart.
Categorize the Momentum State:
Weekly perspective oscillators like MACD (shown) and moving average and volatility envelopes (not shown) are deeply oversold. I use deeply oversold/overbought conditions to help identify charts and time frames that should be monitored for bullish or bearish price behaviors and chart setups. I also use oscillators as a trend filter. But I rarely use them to generate actual buy or sell signals. Last weeks close nudged the weekly MACD oscillator onto an oversold buy signal. But, to be trusted the crossover MUST be coupled with bullish price behaviors.
Evaluate the most important Fibonacci objectives and retracements:
Fibonacci objectives generated from the 179 .70 - 133.19 - 155.12 sequence: Equality at 108.34, 1.38 @ 90.51 and 1.618 @ 79.49. The market found support at equality.
Fibonacci Resistance generated from the X - C & B - C declines: I prefer to look for clusters. The most likely resistance cluster falls in the 132-135 zone.
When it comes to Fib levels, I like to keep it simple. I hate to see charts with dozens of Fibs scattered about. In my opinion, it devalues the more important levels.
Examine the price/volume relationships in the trend of lower degree:
Volume Detail: The footprint of a subtle shift from supply driven to demand is evident. Two bars in particular, May 5 and June 13 (circled) drew my attention. It would have been easy to dismiss these two as supply, but on my charts I labeled them as demand. Both bars are large gap down days, but note that they closed well off the lows, in the upper portion of the periods range and on much higher than normal volume. Note also that volume pulled back on the decline from the May 27th high (rectangle). This reduction in volume represented a significant lessening in supply. In other words, selling was far less urgent than the selling that had characterized the earlier portions of the decline. Over the last few sessions signs of supply have developed but volume on the pullback has been modest compared to price spread.
Examine the perspectives of higher and lower degree:
Triple Screen: The chart of higher degree will help determine how aggressive trade positioning and risk management should be. The chart of lower degree is used for trade placement, tactical entries and stops.
Monthly: Trend of higher degree is clearly bearish and not oversold. Rallies in the weekly perspective will likely be corrective/countertrend as opposed to the start of a new long term trend. A large head and shoulder top is visible in this perspective that projects as low as 88.00. Volume (not shown) has been extremely heavy, confirming the trend, but perhaps being a bit on the exhaustive side. Against this backdrop rallies will have a tendency to fail early and surprises will tend to be bearish in nature. This suggests that positioning in shorter perspectives should be conservative and stops should be raised aggressively behind trades. Trade management should be generally conservative.
Daily and other: If the weekly chart supports positioning, move to daily and hourly perspectives to build trading and risk management plans.
Other Considerations:
Are there any seasonal tendencies in play? Bond prices have very strong seasonal tendencies, weak into the May - June time frame, stronger into the middle of September, and weak into the end of the year. TLT has entered a time of the year when bonds often transition from weakness to strength.
Are the related markets supportive? Industrially sensitive markets like copper and crude appear to have made significant inflections as the market’s attention shifts from inflation to recession. The same can be said for TIPS breakeven rates. On balance, the related markets are supportive.
Do the charts of other U.S. maturities and yield curves support the idea? 2s and 5s are testing strong yield resistance levels and momentum is threating to reverse, particularly in fives. Remember that the two year is very sensitive to the Fed, fives are a combination of market forces and Fed and Long rates (TLT is longer duration) are generally more responsive to the economy and inflation.
Is positioning or sentiment offsides? In rates, Commitment of Traders, options open interest, open interest data from futures, TIC data and fund flows are all fair game. When trading was my job, I monitored all of the above. Now, in retirement, not so much. Breadth, % of stocks above or below moving averages and VIX fall into this category.
Evaluate economic relationships that impact bonds: For example, are the slopes of the ISM and surprise indices consistent with the trade? With the ISM slope clearly negative, bonds are more likely to be bid. What are credit spreads doing? The widening in high yield and investment grade credit spreads is also supportive.
Do I have the sense that there are systemic issues building that might impact the trade? Systemic issues are typically bullish for bonds. While I see less potential for dislocation in this cycle, rate increases of this magnitude usually wreck someone.
Finally, I take a sanity check, am I falling prey to behavioral bias? Am I being dispassionate?
Reach a Conclusion and Design a Trade:
While monthly trends are unequivocally bearish, the market is testing a major support confluence generated by the combination of horizontal support, oversold channel and fibonocci levels. Weekly momentum oscillators are oversold and there are tentative signs of demand developing in the price volume relationships. Recent inflections lower in industrial commodities, TIPS breakevens, and energy are supportive and suggest a growing recession narrative. Bonds are entering a seasonally strong period of the year. While trends are clearly negative, the balance of the evidence suggests that conditions are conducive for a weekly perspective inflection/correction to develop. I will begin monitoring market behaviors in the daily and hourly perspective charts for opportunities to enter. It is likely that a rally into the third quarter will set up a very high percentage selling opportunity.
Design the trade:
For liability reasons the CMT Association precludes me from making direct recommendations. So, this is where I leave you hanging. My goal was to show you how I do the analytic steps leading up to designing a trade. But a few general thoughts:
Trade entry should be timed using the charts of lower perspective (daily and hourly). Remember, the recent low has yet to be tested, and the market is far away from a logical stop loss placement.
Since a long trade will be counter trend, strict attention to risk control and entry tactics will be required. Surprises are inevitably in the direction of the trend… plan accordingly.
The Fibonocci retracements and overhead resistance zones outlined above can be used to ascertain if a trade has a reasonable reward for the risk taken. Look for confluences of horizontal, dynamic and Fibonoci resistances to build objectives.
Which brings me to my final points in regard to process. I believe that simplicity leads to robustness. I consistently follow the same basic building blocks/process for all my trades, no matter the context or the market. Most importantly, most of the considerations described above are just details. Support, resistance, trend and the price volume relationships get you almost all the way there. I’m not going to pass a trade with a good risk reward because the seasonal is wrong or the trend higher degree isn’t supportive. Analysis paralysis is real. Decide what the most important elements are in your process of focus most of your attention there.
And finally, most of the topics and techniques covered above are part of the CMT Associations Chartered Market Technician’s curriculum.
Good Trading:
Stewart Taylor, CMT
Chartered Market Technician
Shared content and posted charts are intended to be used for informational and educational purposes only. The CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. The CMT Association does not accept liability for any financial loss or damage our audience may incur.
CMT Association is a global non-profit credentialing body committed to advancing the discipline of Technical Analysis. Improve investment performance and career opportunities: www.cmtassociation.org
