US Treasury Bonds Look Vulnerable

US Treasury Bonds are at an interesting level here. And the resolution could impact asset classes all over the world. We look at Treasuries as a safe haven. To us, they're a place where money goes when they don't want to be in risk assets like stocks or economically sensitive commodities. So if Treasuries are rising in price, there's a risk-aversion trade to be had. The opposite is also true if there is major selling in this space.

Today let's look at $TLT which is the iShares 20+ Year Treasury Bond Fund ETF. We like this one as a fair representative of the US Treasury bond market. It's also liquid and easy to trade. The first chart is a weekly going back 5 years. Look at the 2008 highs that were also the 2011 highs right near 123 or so. In June of this year, $TLT was able to take out that former resistance but has come back down under 123. The question here is whether that was indeed a real breakout and this is just a retest of (new) support? Or was that a false breakout that just could not hold? We like to look at the Relative Strength Index (RSI) for clues. And sure enough, when prices made fresh highs this summer, RSI was already rolling over putting in lower highs. This bearish divergence calls into question whether this was a real breakout or just a bull trap. Momentum rolling over here is a 'heads up' that further selling could be coming.

Now let's look a little bit closer. Here is a daily chart showing all of the lower highs since July. The fixed support down near 120 appears to be the line in the sand. The Bearish Divergence this summer between prices and RSI got the sell-off going. If these support levels are taken out, there could be some hard and fast selling to come.

From a risk management perspective, we're keeping an eye on this downtrend line from the summer highs. If that gets taken out to the upside, it would be evidence to us that Treasuries are not ready to break down just yet. But the more times that a level is tested, the higher the likelihood that it breaks. And this support keeps getting hit. I think a breakdown here is inevitable. But we'll just have to wait and see.

Tags: $TLT $IEF $TNX $ZB_F $ZN_F $TBF