Get a Hedge on Bonds

Bonds are pushing higher and yields lower today, not paying attention to equities. In fact, the bond push higher and gold push higher has been a yellow flag all day. The correlation between the SPDR S&P 500 (SPY) and iShares Barclays 20+ Year US Treasury Fund (TLT) has been increasing, but still sits at -0.72. Therefore, anyone looking to short equities and believing in that position, who is also short TLT, should consider a short-term hedge on TLT even if the short thesis is long term in nature. Based on the current daily chart, if this correlation is going to decrease, then it will probably take a few weeks. Even then, it will probably just return to no correlation rather than an inverse correlation. In my mind, shorting equities simply acts as a hedge against a short in TLT.

iShares Barclays 20+ Year US Treasury Fund (TLT) Source: StockCharts.com View Chart » View in New Window »

Staying with TLT, there is something else to note in the chart. It looks as though today's close will invalidate the bearish head-and-shoulders pattern that was sitting on the chart for everyone to see and trade. Fortunately, two weeks ago I talked with many subscribers on the Daily Diary about covering the TLT short and waiting for a bounce and better setup. TLT bounced, but the short setups were never in place. Any short attempt was quickly stopped, and now, much to my amazement, TLT looks to be setting up a long based on an inverse head-and-shoulders pattern. Therefore, if TLT is still above $126.50 heading into the final 30 minutes of trade, I am looking to get long September 7 $126-$129 call spreads, as well as September 21 $127-$131 call spreads. The breakout target for this inverse head-and-shoulders pattern is $131.50. The stop level would be consecutive closes under $124.70....104 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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