From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
The path of least resistance is higher for yields, as the market continues to punish investors for buying bonds.
As long as that’s the case, we want to look for short opportunities when approaching the bond market.
Since the shorter end of the curve has ripped higher, the moves in these contracts and ETFs are extended. They simply don't offer favorable risk/reward trade setups at current levels.
We’re better off looking for ways to play rising yields further out on the curve in this environment.
We’re going to discuss how to do just that by covering a few charts that are setting up on the short side.
First up is the 30-year Treasury bond futures:
T-bonds are carving out a multi-year head-and-shoulders top above their pivot lows from last March.
We want to sell weakness on a decisive break below the neckline and those former lows at 153’07, targeting the 2019 lows around 136’16.
We can only be short on a completion of this topping pattern. Our bias is neutral until we get a clear resolution lower.
Next is the 20+ Year Treasury Bond ETF $TLT:
This T-bond ETF has gone nowhere since last March. But it’s currently testing the lower bounds of a six-month range that coincides with a key extension level around 141.80.
We have to imagine if the 30-year yield is catching higher and T-bond futures are breaking down, then TLT is most likely following suit.
If that’s the environment we’re in, we want to sell a break below the year-to-date lows around 140 with a downside target of 123.
To be clear, we can only be short below last month’s low.
Last but not least we have the 10-year Treasury note futures:
T-note futures are retesting a former level of resistance turned support around 127’27. Price is currently coiling in a bearish continuation pattern and threatening to violate this key level to the downside.
If and when we get a break below the pivot lows, we want to be selling weakness with a downside target around 123’28. Like the previous setups, this trade is not valid if it’s above the year-to-date lows. That’s our line in the sand.
Remember, we can’t be short any of these bonds until we have confirmation in the form of valid breakdowns. Maybe they trigger, maybe they don’t.
It doesn’t matter to us. Our focus is on remaining patient, sticking to our trading plan, and always placing risk management first.
Do that, and the rest will take care of itself.
That’s it for today.
Countdown to FOMC
Based on the most recent Federal Open Market Committee meeting, the market is pricing in a rate hike in March 2022. Here are the target rate probabilities based on fed funds futures:
This data is from the CME FedWatch Tool as of February 1, 2022.
Thanks for reading. As always, let us know what you think.
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