What's Ahead For Bonds?

There’s been a lot of discussion on the bond market, mostly due to the Fed-induced anxiety as we wait for Wednesday's FOMC announcement.

I”m going to use the iShares Barclays Aggregate Bond ETF (AGG). I could also use the iShares Barclays 20+ Year Treasury Bond ETF (TLT) as their charts are fairly similar. Since the bond market’s most recent peak in Apri, they have gotten destroyed. You’d have to look at the 1994 bond disaster to find similar total return destruction.

The Bright Side
Can anything positive be said about bonds at current prices? I would say yes. First we have the latest bout of price action. AGG seems to be finding support at the 38.2% Fibonacci retracement off the 2011 low which was just under $97. We’ve now had three tests of this retracement level with only a slight intraday break earlier this month. This needs to be the bond bulls line in the sand if they are to take a stand any time soon.

Next up is the positive divergence in momentum. In August as the Aggregate Bond ETF was testing the June low, the Relative Strength Index put in a higher low and repeated this pattern again in September with yet another higher low, this time above ‘oversold’ territory. As to be expected the RSI indicator has been hitting resistance at the upper end of the bearish channel around the 50-55 area. Bond bulls desperately need to get the strength to break above 55 and make a march to higher momentum levels for prices to have a chance to follow.

Price
Turning our focus back to price, we have the 50-day moving average. Twice during the multi-month descent have we found resistance at the 50-MA -- most recently on Monday. While I see positive components of a bullish bond setup, I need to see a break of the moving average to the upside for the bond trade to gain favor.

The pieces are all there for bonds to rally, not to mention the extreme bearishness in the sentiment data. But I continue to let price guide my bias and will welcome higher prices if bonds begin to confirm the action we are seeing in momentum and turn higher. If not, then its back to the drawing board.

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