Prices of longer-dated US Treasury notes and bonds as represented by the iShares Treasury Bond ETF (TLT;xnas) have rallied strongly again since last week's Brexit vote.
Even over the past two days as equities and other risk assets were bid, treasuries held their gains. In the near term the TLT ETF looks to be in for some consolidation lower before a next rally stands better odds.
While stocks have seen a volatile going thus far in 2016, US bond prices have had a decisive bid underneath them despite the Federal Reserve's's flip-flopping on potential interest rate hikes. This bid in bonds, i.e. this drop in yields, shows that smart money investors don't foresee any dramatic interest rate increases anytime soon and likely thus also don't believe in any sudden new pickup in economic growth.
I too am of this view and do think bonds remain a buy on dips.
On the multi-year chart we see that the post-Brexit rally in TLT has pushed it marginally above the 2015 highs and to the upper end of the up-trending channel (black parallels). Ultimately I do think prices will push above this horizontal resistance area but in the near-term it looks like a pause is needed to reset the chart.
On the daily chart we see that the TLT ETF had two strong up-gaps last Friday and this Monday and has consolidated since. On Wednesday, TLT gave us a bearish engulfing candle, which is a further signal that upside in the near term may be limited and capped.
Management and risk description
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Source: Saxo Bank
I want to be rather near-term and tactical in this trade, which is to say that any strong daily close back above this week's highs around the $140 mark would be a sign to close the position.
Entry: sell short the TLT ETF or CFD at $139 or lower.
Stop: a daily close above $140.
Target: $136 and possibly $134 as a second price target.
Time horizon: two to four weeks.
— Edited by Michael McKenna
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