Wednesday, May 18, 2011

Seems Like Yesterday Everyone Wanted to Short Treasuries

by Gregory W. Harmon

Can you remember the last time that someone was preparing to short Treasuries? It could not be that long ago. Oh, yeah, I remember it was when they bounced off of the 8 year rising trend line in the beginning of February. It seemed so simple then. There were two catalysts. The Government was going to continue to spend more than it took in and therefore need to continue to issue more debt. And with the deflating of the dollar through endless rounds of Quantitative Easing (QE) the resulting inflation would also hurt Treasuries.
Did all that change in the matter of 3 and a half months? Are we closer to balancing the budget? Has the dollar bottomed? Many would answer these questions in the affirmative or at least say that we are moving in the right direction. Others would say that nothing has changed. But what do the charts say? Using the iShares Barclay’s 20+ Year Treasury Bond Fund (ticker: $TLT) and PowerShares DB US Dollar Index Bullish Fund (ticker: $UUP) as proxies, they tell a story of an impending crossroads.

TLT vs UUP – Daily
tlt uup e1305667268288 stocks
The ratio chart above shows the trend higher from the triple bottom from December to February. It rejected at the high at 4.53 previously reached in November earlier this month but is now re-approaching it from a higher low. The Relative Strength Index (RSI) is pointing higher supporting at least a retest, and the Moving Average Convergence Divergence (MACD) is improving. Even the volume is increasing. If it can get through the resistance then it has its last resistance at 4.60 before it sees clean air and a target of 4.73 on a Measured Move (MM) higher. 

The weekly chart below is even more interesting. It shows that a rise to 4.60 would complete a ‘W’ – ‘V’ pattern. Also note that the over the last 4 years the trend for the ratio has been higher. The RSI is trending higher but the MACD is leveling in positive territory.

TLT vs UUP – Weeky
tlt uup wkly1 e1305668625344 stocks
Both timeframes suggest that the path for the ratio is higher. That fits with the view that QE2 will end without a QE3. And that as the Federal Reserve keeps saying, any bump in inflation will be transitory. And that the budget negotiations driven by the need to compromise on the debt ceiling will result in reducing Treasury issuance. Seems like a tall order for just one of these to come true, but hey this is what the charts say. Or is it? The charts do not guarantee that this will happen. Wait for the break of resistance before you put your money on it. A rejection at 4.53 again and all bets are off.

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