An Important Update on $TLT

Previously, I suggested that $TLT would fall to circa $126 and we’re there now and we should see how things stand.

First, in a basic sense, let’s examine the structure. From the COVID crash, I believe we have (at least so far) proceeded in a huge, 3-wave decline. That’s the cycle (yellow) a-b-c. My target in that linked post above came from two features of this chart: the long-term trend line below and the nearest fib relationship to that channel:

TLT

We hit the fib today, but not the channel, but there are slightly different ways to pin the channel. This channel, as I’ve drawn it is strict, meaning I’ve captured candle wicks and shadows from years ago, but the channel goes so far back that grabbing candle bodies way back there instead can move this end of the line somewhat significantly, and so it’s possible to just assume that we’re basically at the channel now (partly because of that delicious fib).

And so now we have two choices. This channel actually goes back well beyond this ETF’s birth: it’s the 40-year bond bull market we are familiar with. Now, the question is: is that bull market over? If it is, we will break this channel, and if not, we’re going to start going up and probably for years from this point.

If the bond bull market is over, then we may very well be in an inflationary period in which yields will continue to rise for some time. However, this is also the very exact spot where we get to test that inflationary hypothesis. Do you know what will put an instantaneous inhibition on inflation?

That’s right: a recession. Those forces are deflationary. And so hell, for all we know, given the yield curve inversion we just had, we may very well end up doing just that.

Someone the other day in the chat lounge asked an interesting question, one that I’ve been thinking about for a while: wouldn’t we expect to see a movement into bonds on the brink of a recession, i.e., shouldn’t we be able to detect smart money moving to safe haven?

And yes, I like to look for at least three things leading into a bona-fide bear market:

  1. Yield curve inversion. We got that.
  2. Oil leading us lower, at least by a few weeks. We got that.
  3. Yields leading us lower. lol No, we don’t have that one yet.

So, in answer to the question: Why haven’t yields turned down? One weird answer might be that we simply needed this channel test first.

Furthermore, if the bear wedge hypothesis turns out to be true, the S&P may take the form of “angling up” into June or so. The “wedge” is a “rising” structure. And if yields turn around here and start falling, we will have a multi-week divergence between stocks “angling up” while yields “turn down.” And that should be a sufficient signal. It will give them weeks to move into bonds. Another interesting thought: if the market has already distributed, and they’re not in bonds, where are they? Looking at the dollar index is the best I’ve got for the moment.


Alright, let’s look at two options:

Bond bull market is still on. If that’s the case, I would expect $TLT to begin some kind of huge, 5-wave, multi-year advance back to the top of the channel:

TLT

Bond bull market is over. If that’s the case, then we would have to ignore my count, and develop something different. But, I still would hardly expect us to be able to crack this channel easily. A 40-year channel is not going to give up the ghost without a monster fight. So, at the very least, I would expect a long consolidation here, either above or below the channel building energy for a bigger move lower:

TLT

So, at least in the short-term (several months), I would expect this decline to stop.

And there’s another way of looking at the structure we’ve had that leads me to believe this present move is ending. If we retrace the decline from December and set it aside (the thing I’m pointing to below), we can see that each leg lower has been steeper, but also each leg lower is shorter. If the bond bull market was over and we were going to crash this channel, I would expect us to need a huge 3rd wave to do it, and those get steeper and longer with each subsequent wave. What we’re seeing is more likely to be the end of a move, not the beginning nor the middle of one. The verticality of this latest drop may be capitulation bottom.

TLT

So, at least in the short term, I expect a rally in bonds soon. And if we’re headed toward a recession, it’s about where we’d expect to get one, too.


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