Trump’s successful White House bid has decimated bond prices. The long-awaited awakening of inflation — or at least the perception of such — has bond bulls running for the hills. At its current perch of $117.67, Wall Street’s go-to proxy for long-term Treasury bonds, the iShares Barclays 20+ Yr Treas.Bond (ETF) (NASDAQ:TLT), is now down 18% from its all-time highs.
With bear country beckoning and TLT all too willing to respond, it seems sellers have all but won the day in the land of fixed income. And yet, beleaguered bond bulls — or at least spectators looking to buy this bond price dip for a trade — should take heart. If recent price action is any indication, a snap-back for the TLT ETF is on the horizon.
Click to Enlarge
Let’s begin with the big picture. A five-year weekly chart should do the trick.
The post-election plunge carried TLT deep into oversold territory. The stochastics indicator (shown in bottom panel) is scraping the bottom of its range. While the fund certainly could continue plumbing the depths here, it’s unlikely a massive downturn kicks-off here. Take note of how deeply oversold TLT has become.
Mean reversion is rooting for a rebound.
Another development favoring buyers is the support level looming closely. Over the past five years, the $115 zone has acted as support/resistance multiple times. It is as logical a level as any for bulls to step up and defend.
Click to Enlarge
Zooming into the daily chart reveals that the downtrend in TLT has been slowing. Though sellers have succeeded in carving out a series of lower pivot lows, their strength has been waning. The lack of momentum is manifest in the RSI divergence that has cropped up over the past month.
A High-Odds TLT Trade
If you think bond prices can cobble together a bounce here, sell a bull put spread. You can sell the Feb $112/$109 put spread for 39 cents. Consider it a bet that TLT remains above $112 for the next seven weeks.
The max reward is limited to the initial credit. The max risk is limited to the distance between strikes minus the net credit, or $2.61, and will be lost if TLT sits below $109 at expiration.
By risking $2.61 to capture 39 cents, the vertical spread offers a potential 15% return on your money.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
