\*All rights reserved! Redistribution of this publication is strictly prohibited. There is substantial risk of loss in trading futures and options.


*All rights reserved! Redistribution of this publication is strictly prohibited.

There is substantial risk of loss in trading futures and options.

Past performance is not indicative of future results

On the radar:

* The 30-year bond futures (ZB) is highly correlated with the USD. Thus, as the dollar goes...so will bonds.

Off the Chart TLT Weekly

The Treasury rally could be capitulating (we use the TLT ETF for long-term charting purposes, but we are trading the ZB futures/options)

*Throughout this discussion we use the TLT for charting purposes due to the ability to do long-term analysis without interference of futures contract expiration. However, we are trading the ZB (30-year futures and options traded on the CBOT division of the CME).

Last week we issued a DeCarley Perspective discussing the Treasury market, if you missed it click here to review.. This week, we'd like to take it one step further and throw the USD into the mix.

Technical Outlook of the Treasury Market

Technical analysis corroborates the premise of a lofty Treasury market. The TLT (iShares 20+ Year Treasury ETF) is dramatically overbought. The recent run has matched its 2012 peak, which was obviously achieved in a far more fundamentally justifiable environment. In 2012, the employment report was 2 percentage points higher, the S&P was near 1,300, and the Fed was heavily indulged in a stimulus campaign aimed at lowering interest rates.

In addition to possible technical resistance near the previous all-time-high, the Relative Strength Index applied to a weekly chart has spiked above 70 for the fifth time since 2008. In the previous three occasions, the Treasury bull eventually faltered. Similarly, the Slow Stochastics technical oscillator suggests the current rally is overheated with a reading in excess of 80. Like the RSI, the Slow Stochastics indicator has not shown TLT prices as being this overextended on a weekly chart since mid-2012, and previous occasions of such a reading have been precursors to large corrections. Accordingly, the risk of a price reversal is growing exponentially. With this in mind, we believe it might finally be time to begin looking for lower bonds and higher interest rates.

Off the Charts TLT Monthly

We often look to the monthly chart for corroboration of our weekly chart analysis; the monthly chart of the TLT tells a similar story. On a monthly basis, the TLT has only seen RSI and Slow Stochastic readings this lofty on two other occasions in the previous decade; in each of those instances the Treasury market managed to carve out significant, and rather violent, tops. The most notable took place in 2008, and saw a decline in the TLT to 87 after peaking near 123; his marked a roughly 30% decline in a matter of six months.

The next resistance, and possible reversal areas, for the TLT lie near 134.00 and then again near 139.00. We aren’t expecting to see 139.00, but we can’t rule out the possibility of a temporary spike to this level so traders should prepare accordingly.

Assuming Treasuries find a high as we suspect, both the weekly and the monthly charts are suggesting prices near 110.00 could be in the cards in the next several months. On a shorter-term horizon, trend-line support looms near 122; but in the longer-run, selling could extend to 100ish if fundamentals, and the Fed, follow suit.

Off the Charts Dollar Weekly

The Dollar’s Role

Whether or not our expectations of a Treasury peak in 2015 become a reality will be largely dependent on trade in the currency market. The correlation between the U.S. dollar and Treasuries is surprisingly consistent. At the moment, the greenback and the 30-year bond futures contract move in the same direction approximately 87% of the time. Thus, as the dollar goes, so will likely go government backed securities.

Clearly the dollar is in the midst of a spectacular rally, but we caution that when the dollar has enjoyed similar success in previous occasions it hasn’t necessarily ended well. The current rally is only the third time since the financial collapse in which the RSI on a weekly chart has surpassed 70 and the slow stochastics indicator has climbed above 80. In each of the previous examples, the dollar index fell sharply. This conclusion is parallel to that of the TLT due to the high correlation between these two markets.

Off the Charts Gann Fan Dollar

We often apply a Gann Fan to markets that are experiencing parabolic, or near parabolic, moves in attempt to get a grasp on how extreme prices could get. When the Gann Fan is laid over a dollar chart, it is clear that the current price is extraordinarily excessive. Further, the current price is bumping up against the 1 x 3 fan line (this line represents the path a market would take if it were moving 3 units of price for every 1 unit of price). We can’t rule out a last hurrah rally that pushes the dollar to the 94.00 area, but we doubt prices will be able to sustain prices above 90.00 for much longer.

If you are unfamiliar with the Gann fan, it is a technical tool developed by W.D. Gann using the premise that markets trade in geometric and cyclical patterns. The fan itself consists of a series of nine diagonal lines which are believed to provide technical support and resistance to price movement, and more importantly potential reversal areas.

If our chart analysis in the dollar is accurate and the currency markets roll over, it would be highly unlikely for the Treasury market to resist following suit. Some argue that U.S. Treasuries are being led higher by weakness in the European economy, and in particular, an intense flight to quality into sovereign debt. There is some truth to this argument, but in our opinion, action in the currency market will trump any influence in trade at the hands of the foreign interest rate markets. In other words, if European sovereign debt continues to increase in price, and therefore offer lower yields, we estimate it would offer a buffer that could slow down the selling of U.S. Treasuries but we doubt it would prevent it.

*There is substantial risk of loss in trading futures and options.

*There is substantial risk of loss in trading futures and options.


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Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data.

Seasonality is already factored into current prices, any references to such does not indicate future market action.

There is substantial risk of loss in trading futures and options.

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