Where my bond trading friends at?!
We’ve got a central bank potential catalyst ahead that could get bond prices and yields jumping before the end of the week. Will traders use that to play the longer-term trend lower?
TLT Bond ETF: 4-hour
TLT (20+ Year Treasury Bond ETF): 4-Hour
Bond prices have been getting crushed all year as traders anticipated and priced in high inflation rates and the expectations that central banks would tighten monetary policy aggressively to prevent runaway inflation.
We can see that story play out in TLT (the 20+ Year Treasury Bond ETF), which has fallen since December from around $145, when the Fed began hints of reducing loose monetary policy.
On the four hour chart above, we can see that trend is still intact, clearly characterized by the falling 100 and 200 SMAs and “lower, highs and lows” price action.
The most recent “lower high” occurred just this past week, forming around the Fibonacci retracement area of the latest swing move lower, which also happens to line up with early May support behavior between $114 – $116.
The question we’re asking now is whether or not that area will hold as resistance once again if retested, which is a possibility as volatility may rise around Wednesday.
It’s then that we’ll hear from the heads of the Federal Reserve, the Bank of England and the European Central Bank at the ECB‘s central bank forum, and if the rhetoric is more hawkish (signals stronger monetary policy tightening outlook ahead) than what we’ve seen recently, bond sellers could be back in force.
That makes any short-term of the Fibs one to watch for bearish reversal patterns before considering a potential short play. If selling pressure occurs right away, then watch out for a sustained break of previous lows around $108 before considering a potential longer-term play.
On the other hand, if we see talks that current central bank actions could cap inflation conditions, or if they see a recession coming around the corner, that could possibly lower the odds that traders will continue to bet against bonds in the short-term. That could lead to a short-term rally, which could push TLT above the resistance zone.
Given that the longer-term trend is lower, jumping long on an upside break seems like a lower probability trade scenario, but it really all depends if we get game changing commentary from the central bankers this week.
So, stay tuned for this potential market moving event and manage your risk accordingly!
This content is strictly for informational purposes only and does not constitute as investment advice. Trading any financial market involves risk. Please read our Risk Disclosure to make sure you understand the risks involved.
