Sipping The Long Bond

In the early part of 2015 the US long bond proxy (TLT) peaked right at $134/share. I remember it well as the bond bears were out in force predicting the end of the world for those who owned bonds. They had a good reason to believe this was going to be the case, remember the FED started jawing very loudly about raising rates. And rising rates is not good for bond holders. From that point, TLT lost more than 16% (peak to trough) at the same time unwinding its overbought condition in its downward consolidation.  But a funny thing happened the fundamental story stopped working. The market apparently inserted its earplugs because TLT's price has been in an upwards trajectory since the June low and is now just $2 away from the Jan 2015 high.  This is a great example of why paying attention to just fundamentals or the talking heads can get you in trouble. Price is all you need.

As you can see in the weekly chart of TLT below, the past year and a quarter price has consolidated and formed a very nice cup and handle continuation pattern. This consolidation has the (red) 200 day moving average change from down, to flat, and to now up.  Additionally, the overbought RSI momentum condition has had time to unwind but not too much as to send it into the bearish zone. Finally, with cup and handle patterns additional validation comes from seeing volume decline when forming the handle of the pattern which is exactly what occurred.

Pleasantons best financial advisor investment expert, cfp retirement planner - 5-18-16 TLT

As with all chart patterns, this cup and handle is no different and will need to confirm before it becomes valid. This would occur with price closing and holding above the rim of the cup (~$134), which it has not yet done. And because we are up against major resistance combined with the fact today is a FED day and their announcements (unfortunately) can and do move the markets, I am not convinced this “continuation” pattern will actually continue. It could just as easily turn out to be a major reversal level and the pattern fail. Either way, the ramifications to all markets could be enormous and as such all investors need to keep what happens to bonds front and center.

As a side note, knowing price patterns can greatly help increase your success rate when investing. But buying or selling in anticipation of the pattern development and confirmation provides no edge at all and, in my experience, will hurt your returns.