Drilling Down to the Bond Core (TLT,UUP,GDX)

Drilling Down to the Bond Core (TLT,UUP,GDX)

Before we jump into the fray this week and send you reeling with our ever colorful prose and one-handed, market-beating prowess, we’re going to take a moment to report on two trades that require attention.


The first was launched on the 13th of August in a letter called We’re Selling the Bond Rally, wherein we advised you to make two separate trades. The first was the sale of CALLs on the iShares 20+ Year Treasury Bond ETF (NYSE:TLT).


The reason for the advice was purely technical. We wrote –


After a very sharp bounce higher that coincided with equity market weakness, TLT has risen to its 137 day moving average…and we have good reason to believe that the rise will end precisely there. Why? Because the 137 day moving average has proven itself the workhorse in the moving average arena, reliably marking key resistance and support levels time and time again. And because it turned over in early June and has now been gathering momentum on the downside, we feel there’s little hope for a TLT breakout above that line at this juncture…


As it turned out, we were dead on. The CALLs expired worthless for a 100% gain of the premium sold ($1.37).


We also advised you in the same letter to sell premium on the Market Vectors Gold Miners ETF (NYSE:GDX), a stock for which we also had little hope at the time.


And presto-boffo, there, too, we hit paydirt with another 100% percent win. The advice was to sell three GDX December 17.50 CALLs for $0.89 each, for a total credit of $2.67.


All told, your winnings are $401. And that’s just fine.

Line em up

The next trade on the slaughter-block is from a letter called You Can Make Money from Illusions that we penned on the 20th of August. In that missive, we urged you to buy CALLs on the PowerShares DB US Dollar Bullish ETF (NYSE:UUP), specifically the UUP December 26 CALL for $0.25, and to sell the UUP December 25 PUT for $0.40. Your credit for the pair was $0.15.


And how did it end?


The way all bullish trades on the buck end these days – with a profit.


Here’s the breakdown –


On December 3rd, in Helen Roper’s Revenge, we sold the long CALL for $0.30, and last week the short PUT expired worthless, giving us $45 on nothing expended (including an initial credit).


Call it meager, call it big – we call it money, and we’re taking it.


Bully for you if you loaded up on this one.


And Now…

Steve Jobs

We’re going to look now at a number of charts of the iShares 20+ Year Treasury Bond ETF (NYSE:TLT).


After last week’s rate hike, and all the lead-up to it, including the brou-ha-ha regarding what it entails for the U.S. economy and markets, we believe it’s the charts that tell the tale in the end.


For that reason, we want you to quickly survey the monthly, weekly and daily charts of TLT to get a better idea of the way the world of finance understands the long bond at this stage, and to appreciate the shape of things to come for roughly the next six months.


Here goes –


We start with a long term overview. This is TLT’s monthly chart for the last five years –

technical 1

As you can see, the monthly chart is illustrative of the broad sweep of buying and selling in the bond pits. You can also see that RSI and MACD indicators reveal the direction of that trend in smooth fashion. When RSI goes sub-waterline and MACD crosses over to the downside, we’re in bear mode (in blue). When the opposite occurs, we see bullish action.


The current indication is clearly of a bear trend in progress since the summer (blue circles at right), but because the pair acts as a lagging indicator, we can’t be sure how long the current decline will last.


Only that we’re declining.


Now look at three years’ worth of the weekly chart –

Technical 2

A few significant items here –


  • First, look at the overbought indication from the Relative Strength Index (RSI) back in January of this year (blue circle). An overbought indication of 80 or higher on a weekly chart is a rare occurrence and is a clear signal of a change in trend. That this signal flashed alongside the all-time high for the long bond tells us unequivocally that the party is over, and the downtrend will very likely continue for some time.
  • Next, both RSI and MACD went sub-waterline in the spring of this year (see black boxes), with RSI thereafter playing about that mid-way marker without making a clear commitment in any direction. We believe the next break will mark both RSI and MACD definitively bullish or bearish.
  • As to that breakout, it should be coming soon. We have a year-long pennant pattern forming that’s coming very close to a resolution (red lines). With the upper band at 123 and declining, while the lower rises from 119, the long bond is quickly coiling into an increasingly tight range. When the breakout ultimately occurs, we’ll know definitively whether the long term bear market in bonds – hinted at in the monthly chart – is now a wrap.


And now for the daily –

TLT Technical

It’s the moving averages that seize all the attention here. Specifically, we have the short term MA having broken below all her sisters, the all-important 137 day moving average just minutes from doing the same, while the longer term MAs (orange and yellow) are clearly flattening in preparation for a potential rollover.


It looks bad.


Add to that, price action that’s increasingly struggling to hold at the long term (yellow) MA, while moving lower in typical bearish staircase fashion, lower highs and lower lows, and you get a bleak prognosis for the long bond.


It’s for that reason we offer the following long term trade for capitalizing on what we see as the Fed’s nail-in-the-coffin rate hike last week.

Here is how to play it and profit:

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Options Trader Elite recommends you buy two (2) TLT January (2018) 100 PUTs for $4.25 each and sell one TLT January (2018) 124 CALL for $7.20, for a total debit of $1.30.


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The cap is on.


Season’s greetings to all our readers, and many happy returns!


Matt McAbby

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