ETF Chart To Watch: iShares Barclays 20 Year Treasury Bond Fund (TLT)

by on February 8, 2011 | ETFs Mentioned:

Domestic equities are relentlessly continuing to march higher. In fact, the S&P 500, Dow Jones, and Nasdaq, have all yet to trade lower for more than three consecutive days since December of last year. This remarkable run continued Monday on Wall Street following a round of encouraging merger and acquisition news from AOL, Danaher Corp., and Ensco PLC. Meanwhile, in commodity markets, Copper surged to new highs after Chilean officials expressed concern that their country, the world’s biggest exporter of copper, might soon face power outages due to a drought in the region. Gold was mainly flat, but the precious metal did mange to inch higher above the $1,350 mark. Oil on the other hand slipped, and extended its tumble from last week, managing to trade lower towards $87 a barrel. Amidst all the optimism yesterday Treasurys slowly crept up, suggesting that investors are aware and cautious of the ongoing surge in equities.

Thanks to this push to equities, one of the more popular bond funds on the market, the iShares Barclays 20+ Year Treasury Bond ETF (TLT), which tracks the Barclays Capital U.S. 20+ Year Treasury Bond Index, has lost just over 5% year to date. TLT has made its way onto our radar screen since the fund is approaching historically significant price levels.

Long-Term View

Looking at the monthly chart below, it is evident that TLT has been in a slow but steady uptrend since inception. A closer look at the chart further reveals that the fund moves in a very cyclical nature as well. Also, the stochastic momentum index shows that TLT has recently slipped into oversold territory. This indicator is suggesting that while further downside is possible, it may be safer to wait for a confirmation that it is done falling, instead of trying to call the bottom. If history repeats itself once more, then TLT is due for a modest uptrend in the coming months [see ETF Ideas For Deflation Defense].


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Short-Term View

TLT’s previous low was at $87.30 a share back in April 7th of last year. Since then, the fund has managed to climb all the way to $109.34 a share and subsequently retrace back down to the $90 level as expected. TLT is currently trading at around $89 a share, and it is very likely that the fund will test its previous low near the $87 level. Given its historical pattern, however, it is just as likely for TLT to establish support around current levels (perhaps slightly lower), and use that as a base for its next uptrend. The fund’s daily stochastic momentum index is currently oversold, and a failure to close above $90 a share in the next few days would put additional downside pressure on TLT.


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Given that TLT is approaching historically significant lows, coupled with the ever increasing uncertainties that still plagues global financial markets, it wouldn’t be much of a surprise to see Treasurys rally as investors continue their flight to safety. If the fund trades below $87.50, then the long-term uptrend must be reconsidered since the fund’s cyclical pattern may be due for a change, which is usually indicative of a shift in market fundamentals. Likewise, if the fund bottoms out in the next few days, then it may be prudent for investors to establish long positions. Also, TLT provides great portfolio diversification since it serves as an excellent hedge against the equity market, as it’s known to move inversely with the S&P 500.

Swing traders might find themselves frustrated with trying to pin-point the reversal of TLT, as the fund has a history of trading sideways prior to resuming upward trends. Making bets with options can be just as difficult even for seasoned investors, since time decay is a well known foe that hurts those who wait too long for trends to manifest themselves. The best advice for traders and investors alike is to wait and observe TLT as it approaches previous lows and attempts to build support. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit taking techniques.

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Disclosure: No positions at time of writing.