Watch for a minor bounce in treasuries
Bigger picture, we're probably at the start of a larger decline
With FOMC scheduled for Wednesday, we wanted to give readers an update on treasuries and the related ETF. After a trending decline that was stronger than expected, we're watching for a possible bounce from a support area in bond futures.
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Recall we believe bonds formed a durable high in early 2020 after spending a decade progressing through an ending diagonal pattern. Now we are watching to see what form the next downward pattern will take.
We expect price to form some type of motive wave down from the 2020 high, although we believe this year's downward move might not be forceful enough to become an Elliott wave impulsive pattern. A downward leading diagonal seems more likely, but either scenario would produce a five-wave downward structure.
On the monthly chart, geometry and certain Fibonacci techniques suggest that price should reach for the area near 148^23 or 145^09 sometime during the next one to two years to complete the first motive wave down. However we believe a minor bounce is due sooner than that.
Turning to a weekly chart, the recent decline has the look of a third wave, and it also looks somewhat oversold in the near term. Note that two of the prominent price cycles shown on the weekly chart are currently near their low points. We have marked some extension targets for wave 'iii' at 155^31, 154^22, and 152^31. Price closed last week beneath the highest of those levels, making the next one viable.
If a wave 'iv' bounce takes place from nearby, we would expect a relatively shallow upward retracement, but keep in mind that the scenario of a leading diagonal would allow some overlap between wave 'iv' and the earlier wave 'i'. Initial resistance to a bounce awaits areas at the prior 156^27 support level. Above that, wave 'iv' can retrace to 158^19, 161^28, 165^01, or 168^10 before futures resume their decline in wave 'v' of (i).
Translating the forecast to the iShares 20+ Year Treasury Bond ETF, note that the proposed wave 'i' reached relatively deeper than it did in futures. Price is only now retesting the area. Any bullish traders might allow TLT to test next extension support at 129.10 or wait for a bounce to confirm itself by overcoming prior support at 138.30.
If price bounces from nearby in a shallow retracement, then retracement targets for a fourth wave in TLT await near 144.30 and possibly 149.60.
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