The iShares Barclays 20+ Yr Treas. Bond (ETF) (NYSEARCA:TLT) — representing longer-term Treasuries — are up more than 17% year-to-date. This performance certainly beats the return in stocks over the same time period.
However, moving into today’s August jobs report and into the likely more volatile September/October period for markets, bonds face a critical technical juncture where a make-or-break setup looms.
Before slipping into the long Labor Day weekend ahead, traders and investors today will digest the August jobs report. Last week’s speech by Federal Reserve Chairwoman Janet Yellen in Jackson Hole, Wyoming, in conjunction with comments from other Fed speakers, seemed to hint that a good August jobs report could be the trigger to a rate hike at the September Fed meeting. As such, given the importance of today’s jobs report, any interest-rate sensitive assets should be watched carefully.
To kick off 2016, I offered a bull case for bonds and the TLT ETF. This has been a good trade so far, but now it could move into another make-or-break situation.
Bond bulls are quick to point out the relative and absolute outperformance and lower volatility of bonds versus stocks over the past months. They also point to sluggish economic growth. Bond bears talk about mean-reversion in this long-term bond rally, and the neet for interest rates to come off the near-zero line. A rate hike this month, if and when, could indeed see bonds falter for a bit.
So, let’s see what TLT’s charts say:
TLT ETF Chart
On this multiyear chart of the TLT, we see that in July, the ETF bumped into its upper diagonal resistance line again. It has been consolidating or coiling up below this line ever since. Ultimately, the TLT ETF will either break above this line in a trend continuation move or it will break lower and mean-revert back into the bigger picture uptrending range. This direction should become evident very soon after the jobs report.
On the daily chart, we see that the TLT in early July broke above previous highs from early 2015 (the orange dotted horizontal). The consolidation phase since has taken on an ever-tighter range, and this “wedge” formation will likely soon resolve in either direction.
Through the lens of risk management, I don’t think trying to get ahead of any range-break makes sense. But you could leg into a trade in said direction upon a break out of this range, particularly on a weekly closing basis.
Specifically, a break of the TLT ETF above $140 could set up a trade toward $145-$150. A break below $137.50 could set up a mean-reversion trade lower, with an initial price target near $130.
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