If bonds (TLT) finishes the day essentially where it started, it will have printed an island bar on the weekly chart.
Bonds (TLT) are currently trading in the pre-market around 144.15 – 144.65.
If trading stays in that tight range, with the technical conditions shown below, TLT may set up for a Monday gap-up reversal.
The potential island gap is shown on the weekly chart:
The part that’s not so noticeable on the bar chart (above) is better displayed on the weekly close chart:
TLT is right at established support.
To borrow Steven Van Metre’s assessment, with all the selling and the extremes in short positions taking place over the past six months, bonds have only been able to retrace to well known support levels.
Trigger events have a nasty habit of happening over the weekends.
That’s when the largest number of participants can be trapped with no escape. It’s how the game is played.
The island-gap weekly bar may not happen. Bonds could reverse (or collapse) during the up-coming session.
However, successful participation in the markets requires awareness of what could, or what’s likely to happen … before it does.
Price action has the final say. It’s saying not yet but close.
The weekly chart of TLT shows the area we’re going to look at a bit closer.
The chart has been expanded below:
In the past six weeks, there have been three decisive down weeks.
The black arrows on those weeks show each successive down week has less net travel.
Last week was the shortest net travel of the three. In addition, that week had higher volume than the week prior.
Less range, more volume.
The late David Weis in his Wykoff analysis video (link here) discussed a similar situation using Apache Oil (APA).
The short version of the story is: Less range, more volume … ‘somebody’s buying’.
Although not really a bond fan, the opportunity is there. Risk has been or is being removed (never entirely) and one way to participate in a reversal and bull move is using leveraged funds (not advice, not a recommendation).
This past Friday, I positioned the firm in TMF, a 3X leveraged bond fund.
Volume (liquidity) is acceptable at around 600,000 – 800,000 shares daily (allowing pre-market entries/exits).
It’s important to note, while TLT was making new daily lows, the high yield HYG, ticked just 0.01-point above its post recovery high. Since August of last year, TLT and HYG have been inversely correlated.
On way to read this, we’re at extremes.
We’re just one ‘incident’ away from sending things violently in the opposite direction; complete with down-gaps, trading halts, brokerage lock-ups … the whole nine yards.
Trending higher at nearly 1,000% annualized, it’s obvious a break is coming.
Exactly how or when of course, is not known.
However, it has been proposed by this site (for years), when the final bubble-break comes, it’s likely to be an over-the-weekend event that results in a severe gap down open.
A gap down of say, 20% – 50%.
Can’t happen? After the events of 2020, we should all know that anything can happen.
Theoretically, a gap down of -25% from current levels, puts IWM right at long-time support around ~170.
Under such conditions when a severe disconnect is possible, one approach is to prepare on the short side (not advice, not a recommendation).
Using Wyckoff analysis techniques (for bear markets), that means to look for sectors not participating in the mania. When the downdraft hits, those markets will (potentially) move lower farther and faster.
That brings us to real estate, IYR
Using the same time-scale and trend line notations, we get the chart below:
From a purely visual perspective, the struggle to move higher is obvious. The past two sessions have made no net progress.
Looking more closely at recent action, IYR is following a Fibonacci time sequence.
From the low on January 12th, to the most recent high on Wednesday the 10th, is a Fibonacci 21 days.
The added bonus is the inflection point on Day 13.
Bid/Ask spreads on inverse fund DRV, in the pre-market are not that reliable; at this juncture, 8:10 a.m., EST) they indicate a higher open.