The bearish scenario for treasury bonds that we described in September and again in October appears to be on track. This edition of the free TOTM newsletter shows some upward targets that nimble traders might play for, as well as areas where the next strong downward move might begin.

A bearish scenario for bonds, after a bit more up side

Longtime readers will remember that we followed treasuries through their climb up a multi-year channel and then watched price break downward, as expected, out of the channel. Looking farther back, our main scenario counts the entirety of the downward move from the 2016 high to the late-2018 low as the first wave of a larger downward pattern.

The weekly chart for 30-year bond futures shows our main bearish scenario. When we reviewed the scenario in September, price was nearing the end of the sideways consolidation that’s labeled on the chart as small wave ‘iv’ of (v) of [i]. Shortly after that post, price moved downward as we expected to complete small wave ‘v’.

With the completion of wave [i], bonds now appear to be in the midst of a wave [ii] bounce. For traders, there are several considerations here.

The wave [ii] bounce might take the form of a relatively simple (a)-(b)-(c) pattern as we have drawn on the bonds chart. An alternate scenario, still bearish, would have wave [ii] extend longer in time and develop a more complex pattern. We somewhat favor a simple, quick resolution for several reasons.

Even so, the resistance areas marked at 151^13, 153^09, and 156^07 should be relevant during the next several weeks regardless of whether wave [ii] remains simple or becomes more complex. Nimble traders might still play for those as near-term upward targets.

Either one of the supports at 146^29 or 144^31 could act as the foundation for small upward wave (c) into the  resistance targets we mentioned.

The same resistance levels are candidate areas where a strong downward wave [iii] can begin.

Viewing the scenario in terms of treasury yields

Some of the reasons we favor a quick resolution to the treasuries bounce are related to elements of the chart for the Treasury 30-year Yield Index (symbol TYX) shown below. In that framework, a downward wave ‘ii’ in TYX corresponds to the wave [ii] bounce we described above for bonds.

The downward move in yield is approaching important support areas at 27.61 and slightly lower at 25.70. If those levels hold, we expect an upward reversal in yield to happen concurrently with a strong downward wave [iii] in bonds.

If you like to trade the corresponding ETF

The break and re-test of trend line support, now resistance, is easier to see on a chart of the iShares 20+ Year Treasury Bond ETF (symbol TLT). As with futures, we believe the ETF is in the midst of a wave [ii] bounce.

The main resistance areas to watch as near-term targets and areas for downward reversal sit at 127.74 and 131.71, based on one-eighth retracement increments of wave [i].

You’re trading with an advantage when you have up-to-date charts. A Daily Analysis subscription at TOTM gives you constant access to up-to-date with charts on weekly and daily time frames for the Euro, the Dollar Index, gold, crude oil, bonds and the S&P 500. Intraday Analysis offers additional moment-by-moment coverage of the S&P 500, ES futures, and related markets along with more detailed charts for the other instruments.

Good fortune to you in your trading!
— Tom and Kurt at Trading On The Mark