Long Bond Nears Critical Juncture

  • SumoMe

When it comes to trading, I am all about “quantifying” things.  Still, the fact remains that a lot of useful information can be gleaned from simple observations.  Take the chart in Figure 1 for instance.  It displays a daily bar chart for ticker TLT, the exchange traded fund that tracks the 20+ year Treasury bond.

See also (Jay Kaeppel to Speak to MTA Chicago Chapter on 11/10)

[click to enlarge]1Figure 1 – TLT Contracting/Compressing/Coiling/[Your description here] (Source: www.Profit.Source.com)

As you can see in Figure 1, ticker TLT is presently experiencing what we “trader types” refer to as “contraction” (except for those “other trader types” who refer to it as “compression”). Now drawing trend lines on a bar chart is typically as much “art” as it is “science”.  But in this case it is a fairly objective action to draw what (some of us) “trader types” refer to as “triangle inside a triangle”.  In other words, not only has price now contracted into a larger triangle it has also squeezed down into another triangle inside the larger triangle.  Now that’s contraction!

Quite often (though not always, alas) this type of “coiling” (just in case “contraction” or “compression” do not float your boat”) action sets the stage for a significant price move.  Once the triangle patterns are broken bonds could be ready to embark on their next major trend.

The obvious questions are:

“Which way?”


“How to play?”

I am not going to make any predictions.  I will simply lay out several potential scenarios for your consideration.

Scenario #1: Wait for a Breakout from the Pattern

One obvious choice is simply to wait for price to break out of the triangle pattern and then trade in the direction of the breakout.  The primary concern here is a potential “whipsaw” – where price breaks out one way and then reverses.  In any event, if you choose this scenario then there is nothing to do right now…..except wait.

Scenario #2: Buy a Straddle

This is NOT a recommendation, just an illustration of one of the choices.  A trader who believes that TLT will break out within the next few months and will make a significant price move might consider buying a straddle – i.e., buying a call and a put option.  An example of this type of trade appears in Figure 2 and involves buying the January 122 call and put.

[click to enlarge]2Figure 2 – TLT Jan 122 Straddle(Courtesy www.OptionsAnalysis.com)

This trade costs $599 and has upper and lower breakeven prices of 127.99 and 116.01 respectively.

Scenario #3: Bet on a Huge Breakout in a particular direction

This scenario is for “speculators only”.  In Figure 3 we see that the Elliott Wave projection on the weekly TLT bar chart is pointing to sharply higher prices (be forewarned that these types of “bold” projections have a tendency of not playing out exactly as “projected”.  Still, for a speculator risking a small amount of capital that’s not a deal breaker).

[click to enlarge]3Figure 3 – Weekly TLT Elliott Wave projection pointing higher (Source: www.Profit.Source.com)

One way to play this potential scenario – without risking much money – is a strategy known as the “Out-of-the-Money Butterfly”.  The trade highlighted in Figure 4 involves:

*Buying 2 Mar 2016 130 calls

*Selling 3 Mar 2016 145 calls

*Buying 2 Mar 2016 160 calls

The details and risk curves for this trade appear in Figure 4.

[click to enlarge]4Figure 4 – TLT Mar 2016 OTM Butterfly(Courtesy www.OptionsAnalysis.com)

As you can see in Figure 4 this trade risks only $254 and enjoys significant upside potential if the price of TLT does in fact fulfill the Elliott Wave projection displayed in Figure 3.  The catch of course, is that anything less than a rip-roaring advance will result in this trade experiencing a loss.

Choose wisely.

Jay Kaeppel


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