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Potential Treasury Breakout

I track the treasury market by watching TLT-- it's not the most comprehensive way to analyze the overall treasury market but it works. TLT is an etf that tracks the performance of a 20yr treasury bond. It's actively followed by many investors and has a fairly active options board. Here's the daily chart, with some technical annotations of mine:

TLT Daily

TLT Daily

There's a lot on this chart so let me explain it step by step. First, we have the final, parabolic, capitulative burst higher back in December when the credit markets froze up and there was a rush to safety. I wouldn't call this ":irrational exuberance" -- it was quite irrational but noone was exuberant about diving into treasuries for safety. So after credit eased, money fell out of treasuries and TLT made a round trip on the move back to 100/sh. From there we chopped in a multimonth channel from about {105 100} and then fell further to 87.50.  Overall, the trend is down.

But it seems that TLT could be on the verge of breaking out and making a new higher high-- you can see this on the weeklies so I'd consider this a longer-term development. If it breaks above this most recent level (green line) we should see a further retracement of the downmove. So in terms of price projections, what can we see?

The most reasonable projection would be a run to 99.50, and we can round up to 100 as that will be a psychologically "big" level. 100 is the bottom of the three-month range that we chopped in for several months. 100 is also the 38.2% fibonacci retracement from the most recent down move {Dec Jun}. 100 is also where the 200 DMA is. So there's several technical reasons on why this can be a huge level.

So on a break of the green line with some good momentum, that's my initial target. If we break 100 I think momentum will slow down enough due to the sheer amount of chop that we had in {100 105}.

In terms of the overall macro picture, I'll leave that up to you to come to a full conclusion. Some say the inverse relationship between t-bills and equities could be signalling for an intermediate top; others are considering a defense of the dollar is leading to a rally in treasuries.

I do have an options trade setup for TLT, but I'm waiting for a breakout, and it will be available to subscribers when the conditions are right.

by Steven Place

Steven Place is the founder and head trader at investingwithoptions.com/