Are Bonds Waiting For The Taper?
- Posted by TheArmoTrader
- on September 10th, 2013
Are bonds waiting for the Federal Reserve to taper their bond purchases -also known as QE3- before they bottom out? The 10-year bond finally hit the 3.00% mark for the first time since July 2011 last week. Now, you may be thinking: “If bonds are going down (and in turn, yields up) when the $FED is buying, what happens when they start buying less or even stop buying?”. Well, we already saw this play out in 2011, when the FED completed QE2 and bonds rallied hard. Now part of that had to do with the fact that the $MACRO conditions (Europe, Debt ceiling) were worrying investors – thus the sudden rush into treasuries. But I bet you part of it had to do with the fact that a lot of people expected bonds to plummet once the biggest buyer stopped buying. Well, that didn’t happen and everybody who was short got ran over. The Fed’s pie of federal debt held is actually not as significant as its made out to be.
But now, bonds have been falling. As I noted in the past, treasuries have not been a good technical bet for the bulls. And it still looks ugly. But are they waiting for the FED’s announcement of the “taper” before they bottom out and rally? It’s certainly possible.
(Side note: If this blog post blows up and everybody reads it, it won’t be possible because then everybody would be waiting for the taper for a bottoming out in bonds…)
(Side note 2: There may be no taper. Which would make this blog post relatively moot. Also, the taper could be announced and bonds could STILL go down. So even though I have a theory, I need technicals to confirm it.)
While I do like my theory, it won’t matter if there is no technical trade to be made. Here are some things I’m going to be looking for after/during the taper announcement. For what it’s worth, if bonds do bottom before the taper announcement, that’s totally fine. It does not mean that you cannot catch the trade anymore. You do not have to catch the bottom to be part of the trade. I forget who said it but you will have your success by being part of 80% of the move (the meat of it) and not by being in at the bottom and exiting at the top (or vice-versa for shorts). Also, even if I miss it, a trade’s a trade. There’s always going to be other opportunities elsewhere.
So here are the two main scenarios I’m watching for. I’m going to continue using $TLT as my proxy for bonds.
Here is the weekly chart. Bonds are heavy going into the meeting, thus nearer to the $100 level. They sell off hard, and I mean capitulation hard, when the announcement is made. We get a major reversal off the $100 level. Why $100? No specific reason other than its a round number and in the past it has acted as a small inflection level a few times. Personally, I don’t care if it reaches $100 or not. What I want to see is capitulation and a fast/strong reversal.
Here’s a daily chart. Bonds don’t capitulate and instead create a base as the float slightly up. And when the announcement comes in of the taper, $TLT breaks back above this $106.50 area with some force. Why 160.50? Well, its the main area that I’ve been watching, where (in the chart above) you can see it has acted as support/resistance many times in the past.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus
Jerry Khachoyan is currently an undergraduate student at UCLA pursuing a degree in Political Science. He started trading in September of 2008. He concentrates on using technical analysis and reading the tape to enter the best risk/reward trades. The stock market to him is one of the greatest inventions by man.
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