*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.