Interest rates are already at rock bottom, so they decide to buy Treasury long-term bonds. Increased demand for bonds, the theory goes, will drive up the price, which means it will lower interest rates.
The Fed announces the purchases, and not only that, they add $100 billion to the bond buy. And how does the market react?
The iShares Barclays exchange-traded fund that tracks Treasury bonds with lifespans of 20 years or more (TLT) plummeted on the announcement, traversing 3.8% intraday.
Person's Proprietary Signal, the parabolic sar, the fast stochastic and the macd all move aggressively into bear territory. The price tumbles well below the 1% envelope around the 20-day moving average.
All of which shows that trading based on news is not a simple action-reaction proposition. Ever. But especially when broad economic policy is involved.
| h-a trend | sto | sto zone | pps | psar | macd | macd trend | ma20 | ma200 | |
|---|---|---|---|---|---|---|---|---|---|
| TLT $99.00 |
I always want to ask "Why?" when confronted by such moves, but honestly, in my heart of hearts, I think there's little rationality behind them. It could be as simple as selling on the trumpets ("buy on the rumor, sell on the trumpets"). It could be that only 4% of the bond buy (Quantitative Easing 2 -- QE2) will have maturities of 17 years or more. It could be . . .
Who knows?!?
When confronted by the inexplicable, the wise trader breathes slowly and shallowly with a zen-like meditative calm, and then starts looking at price levels.
On the Person's chart, the decline brought the price from the upper weekly pivot level to the lower weekly pivot. This is not a breakdown but within an expected range under the Person's system, albeit a range covered far more quickly than is common.
Person's Table
| pps | pps open | upper pivot | lower pivot | |
|---|---|---|---|---|
| TLT $99.00 | $101.73 nov3 | $102.09 +3.1% | $98.96 -0.04% |
The decline reversed as it neared the swing low of $98.56 set on Aug. 4. A more substantial support level -- touched thrice during the summer -- is around $97.95. So, yes, it's a sharp decline. But in terms of price levels, it is not a breakdown, a capitulation or a route.
Since hitting a swing high of $109.34 on Aug. 25, TLT has lost 9.5% of its value. The late summer and autumn decline has brought the price down to early summer levels that were last seen in the autumn of 2009.
Reversal Levels
- $109.34, +10.4% (Aug. swing high)
- $101.42, +2.4% (20-day moving average)
- $99.00 --- You are here.
- $98.56, -0.4% (Aug. swing low)
- $97.95, -1.1% (swing low touched 3x)(
- $97.00, -2.0% (200-day moving averge)
For slow traders using the moving average crossover system, the 50-day moving average remains well above the 200-day moving average, although the shorter average turned down in late October, and the slope of the downturn has steepened.
Slow Trading
| phase | ma50 direction | ma200 | ma50 | |
|---|---|---|---|---|
| TLT | $97.00 | $103.36 |
I don't trade TLT on my own account. The yield, at 3.9%, is too low to make up for the volatility of the position. If I'm going to have that degree of volatility risk, then I want something that pays more cash. Otherwise, I'm far better off looking for growth stocks.
However, from a technical standpoint, today's price action is far from being a Titanic-hits-iceberg moment. Arguably, the TLT bond fund remains underpriced in terms of recent price movements.
Today's decline, after all, brought the price up from the lower Bollinger band (2 standard deviations below) to the 20-day moving average. The width of the bands, at 6.7, is a bit narrower than late October's 7.4. A narrower width means less volatility.
If I held TLT, my inclination would be to hang on to the position a bit. A persistent break below resistance in the next few days would change my mind and incline me to close.
Disclaimer
Tim Bovee, Private Trader tracks the trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.
Abbreviations:
- h-a trend - Heikin-Ashi trend.
- pps - Person's Proprietary Signal.
- psar - Parabolic Stop and Reverse
- ma20 - 20-day moving average
- ma200 - 200-day moving average
- macd - Moving Average Convergence-Divergence
- sto - Fast Stochastic
About the glance: The colors indicate the state of each signal.
- h-a trend: Determined by the Heikin-Ashi candlestick, green for up, red for down. Heikin-Ashi averages six days for high, low and close, signalling uptrend if the close is in the upper half of the range and downtrend if it is in the lower half.
- sto: green for bull, red for bear.
- sto zone: green for overbought (80+), red for oversold (20-), yellow for neutral zone
- psar, pps, macd: green for bull mode, red for bear.
- macd trend: green for rising, yellow for sideways, red for falling. neutral.
- ma20, ma200: green for above the average by more than 1%, red for below the average by more than 1%, yellow for within 1% either side of the average.
No comments:
Post a Comment