Ok, I have been bullish on Treasury bonds going all the way back toMarch, 2011, and this was a timely call. Over the past 9 months, strength in bonds has coincided with weakness in the economy. Yet, despite the fundamental reasons for stronger bond prices, bonds really have been consolidating since mid-August. In advance of the Federal Reserve' s "Operation Twist" announcement, bonds did run up rather nicely, but since then and over the last 4 months, bond prices have been range bond. Through all the ups and downs of the price action, my bond model has been steadfastly bullish, and from a technical perspective, I have identified several buy and sell points as prices consolidate within the highs and lows of this 4 month range.
Over the past two weeks, I presented articles (hereandhere) suggesting that bonds have "topped" out. I stated: "Treasury bonds should remain range bound at best or breakdown in the worse case scenario." Based upon the technicals, I felt it was worth reducing my bond position by one half until there was greater clarity. Owing to the positive fundamental picture and bond model, I felt it was worth having exposure to bonds.
But one week later, the technical picture has become rather compelling (i.e., greater clarity), so for the last time this year let me beat this bond issue to death just one more time. Figure 1 is a daily chart of the Vanguard Total Bond Market ETF (symbol: BND). The gold and black dots are key pivot points, which are the best areas of buying (support) and selling (resistance). The price range that extends all the way back to August is noted inside the gray rectangle. The close below and then above the most recent key pivot point at 83.35 is a bullish price pattern. Will it lead to a break out from this price range? Difficult to know of course, but the fundamental picture (i.e., economic weakness) remains supportive of such a move. If a breakout were to happen, I suspect it would be rather dramatic owing to the prolong period of consolidation.
Figure 1. BND/ daily
Failure of this analysis will be heralded by a breakdown in prices below the 82.86 key pivot level.