Monday, April 11, 2011

Treasury Tuesdays

Last week, I wrote the following regarding the Treasury market:

Going forward, I would expect Treasuries to retest the 200 day EMA, perhaps move a touch higher, but then resume their downward trend. The Fed is getting out of the market and the economic numbers on balance are indicating the recovery is self-sustaining (although possibly slowing down). In addition, we have heard more hawkishness from the Fed of late.

Something I did not mention, but will add, is the increased perception regarding inflation. Gold and silver are making new highs, and the TIPS-10-year spread is high, indicating traders are concerned about inflation. Nothing has changed my opinion that the Treasury market is heading lower. In fact, last weeks action simply confirms my feelings about this move.

Prices on the IEF are in a clear downtrend, and have been since mid-March. Also remember that mid-March's bounce was purely driven by short-term fundamentals, caused by the political unrest in the Middle East. Prices are now below the 200 day EMA, and the shorter EMAs are below the longer -- although this development is new and shouldn't be considered too heavily in trading calculations. However, prices have printed three weak candles the the last three days on weakening volume, indicating prices might be looking to rebound and test the EMAs, providing a good opportunity to short the market.

The TLTs hit upside resistance at the 200 day EMA and have been moving lower since. They broke through their upward sloping trendline, became entangled with the EMAs and have been moving lower ever since. Note the long downward bar printed four days ago. Like the IEFs, prices have printed smaller candles over the last three days, which may be signs a a reverse where prices rebound and move into the EMAs.

The underlying technical indicators for both the IEFs and TLTs are very bearish. Both are showing a net-outflow of cash in the form of decreasing A/D and CMF lines. It's very helpful that both of these indicators are moving lower; sometimes the A/D line will move sideways while the CMF shows weaker levels, giving a mixed (and confusing) reading. In addition, momentum is clearly decreasing on both ETFs with the MACD having a way to move lower.

Going forward, I expect the Treasury market to continue moving lower for the following reasons.

1.) Fed hawkishness
2.) Inflation concerns
3.) The end of QEII