Reading the Treasuries

Have Treasuries already priced in the Fed's intention to taper its quantitative easing program? Given the 10% drop in the last six weeks in the iShares Barclays 20+ Year U.S. Treasury Bond Fund (TLT), one would think so. Unfortunately, while the daily chart indicates that we may see a quick bounce back to $112, the slightly longer-term summer outlook is much more ominous.
 
We have bad news from the charts. Although, it's not always what folks are used to seeing, there is a very clear head-and-shoulders pattern. This pattern has taken about four and a half months to form, but when these patterns trigger, they can often be filled quickly. In this case, I would be looking for TLT to move all the way down near par. Of course, this is in direct contract to Jeff Gundlach's thinking yesterday -- and given his track record, it is difficult to pursue this pattern aggressively. Furthermore, if there is any utterance or belief that the Fed will not begin to take action this year, then I would expect a snapback in the TLT. Still, the pattern says to be very cautious if you are long TLT. If looking short, then you have the technicals on your side and should keep $112 or $114 in mind as your stop.

iShares Barclays 20+ Year U.S. Treasury Bond Fund (TLT) -- Daily Source: StockCharts.com View Chart » View in New Window »

My thesis for a bounce is based on the extreme readings on some of the indicators on the daily chart. The ATR (average true range) is reaching a height not seen since last fall. While that took a while to work off, we did see a reversal off a sharp move higher. Furthermore, the TRIX has reached an extreme level and appears to be trying to round out a bottom. Last, there is the potential a bullish divergence is forming in the stochastics, albeit a weak one, which is why I only anticipate a bounce to $112.
 
Overall, TLT seems to be pointing toward a move down. This is a major concern since equities have recently been moving with TLT, so I would remain cautious out there. The question right now is what is the fear trade? It appears only to be the dollar as neither Treasuries nor precious metals nor the yen are finding any love in this selloff.

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