Tuesday, August 24, 2010

Q: Is the Bond/Dollar Run Over? A: Maybe

Earlier today there were chilling technical indicators pointing to the end of the US Treasury Bond and US Dollar Index rally. Here is the post as written about 12 noon.

Original Post

It is interesting that more equity traders a now paying attention to the price action in bonds and the dollar. Sentiment traders would think this might suggest a top is near. But part of the attention is due to the rise of ETF's available to trade these markets. In fact these ETF's do a pretty good job of communicating information on the macro markets to equity traders without leaving their space. This is valuable information as to the potential future direction for equities.

I posted these two charts about 10:30 today

iShares Barclays 20+ Year Treasury Bond, TLT

Powershares DB US Dollar Index Bullish, UUP

When I first posted them I noted that it was early in the day but that something interesting was happening. The US Dollar Index and Treasuries have been trading in tandem lately. The TLT is creating a shooting star formation. This is where the price opens on a gap and jumps higher only to fall back. If it closes this way it is very bearish. It's companion lately, UUP, is in the process of printing a bearish engulfing candle. This is also bad news for the pair and confirmation of a potential topping process in Treasuries.

Be watchful as to how these close. Strong Bonds and Dollar have been driving equities lower. Use these new tools. A reversal could change things.

Trade well.

What has happened since then?

The TLT found support and rallied back to near the days high and the UUP also rallied above yesterday's open.

iShares Barclays 20+ Year Treasury Bond, TLT

Powershares DB US Dollar Index Bullish, UUP

So no shooting star. No bearish engulfing candle. Just a gap up on a strong candle for TLT and a continuation of the resting/flagging since Friday for UUP. Does that mean that we have not topped and are ready for more upside? Not necessarily, as both TLT and UUP are testing resistance (108 for TLT and as marked on the chart for UUP), but it does tell us that the long foretold bubble top in bonds and the dollar did not happen today. In fact what we learned today was that the bond and dollar bulls, after an early lunch, came back to their screens and saw the pullback as value and started buying again.

So maybe we do go higher still or maybe we don't, but we learned, that for today, that the bulls are still in charge.

Trade well.

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