Bottom or Top

Have interest rates topped out?

Said another way, are bonds a good buy again?

Well…

Short-term, yes.

Long-term, NO!

Let me explain…

Here’s a chart of 30-year U.S. Treasury bond futures going back to mid-April 2013. It shows T-bonds are once again a screaming buy, for value and contrarian investors, at least.

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What we see here is a classic example of bullish divergence: Prices continue to make successively lower lows while the Relative Strength Index (RSI) actually rises, making higher lows.

This is part of the bottoming process, which T-bonds worked through since the end of June. Add that to the fact that Treasuries found solid support at the 132 level, having tested the price twice now, today does seem like a good day to buy some bonds if you’ve been waiting for a dip to get in.

But be warned: It’s a contrarian play. The three-month trend is still down. So keep a short leash on the trade.

Futures traders could place a stop-loss order safely at 131, risking about $2,000 per contract.

Stock or ETF investors could buy the iShares 7-10yr Treasury Bond fund ETF (NYSE: IEF). With a stop-loss order around $100, and current prices at $101.50, you’d risk only $150 for every 100 shares.

As for upside potential… it’s well worth the risk. My initial target for 30-yr Treasury futures is 137, then 140 would be the next target. This gives us a reward-to-risk ratio between 4-to-1 and 7-to-1. Very favorable!

(If you buy IEF, consider taking profits on a move up to $105.)

Either way, remember my warning: Keep this one on a short leash! I can’t stress that enough because, when you look at Treasury bonds over a longer time frame, the market looks very toppy. Here’s the same chart as above, going back to 2009 this time.

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As you can see, the 132 level (in green), which recently acted as support, has been the key support level since mid-2011.

Hmm. Seems to me we’ve seen this before.

Remember gold?

For several years, the $1,550 held gold prices higher… until it didn’t.

That’s the risk in Treasury bonds now. Further weakness in bonds could put serious pressure on this level. And if it breaks, the subsequent drop could be sudden and vicious… just like gold’s.

Bottom line: Bonds are a short-term buy. Longer-term, not so much.

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Categories: Markets

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.