Thursday, July 1, 2010

Is the Treasury Run Over? TLT Says Maybe

Monday I advocated as a top 10 idea to get long TLT, the iShares Barclay 20+ Year Treasury Bond Fund. I went long on Monday just shy of 100. Today just after 11:00 I took some profits and converted my long exposure into call spreads to capture more upside. Shortly afterward I completely reversed my view and sold the call spread. What did I see that made me make this decision?

TLT 5 minute chart

Here is a 5 day chart of the 5 minute candles. Notice the move from 10:55 to 11:05, resulting in the shooting star. Notice also that this resulted in a strong break of the 4 day up trend line. As the price broke the 4 day up trend line I decided it was time to take some profits, and sold the stock, but rolled some of the profits into call spreads to continue to profit from the upward move. All is still well at this point and I have locked in a 1.75% return on a 3+ day trade with continued upside exposure.

At that point I switched to look at the daily chart below.

TLT Daily Chart

Upon looking at the daily chart and today's movement it was clear that a close anywhere below 101.80 would be a bearish reversal candle of some sort and so a place to get out. Moving back to the 5 minute chart and using this trigger point, I watched closely. There began to form a downward channel bounded on the line between the daily high and the 12:25 high. When it became clear this down channel would continue, with the touch of 101.80 just before 1:00 and failure to reach the top again, I sold the call spreads. In essence conceding that the close would not break 101.80.

I took a small hit (10 cents) on the call spreads, but far less than the 50cents if I had been exposed to the stock for that short 2 hour ride down. In the end I booked a 2.75% gain on the trade.

What should you take away from this. Three lessons:
  1. In a rally lock in some profits, especially if the rally accelerates rapidly.
  2. Using multiple time frame charts is not only useful for research after the market is closed but also for intra-day trading.
  3. When you recognize that the trade is moving against you get out quickly with your profit. No one has every gone broke booking profits.
Hope this helps. Trade'm well !

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