Bear Flag For Bond ETF

02/13/06 08:01:30 AM

by Arthur Hill

The iShares 20-year T-Bond Fund is digesting a sharp decline with a rising flag, and a support break would signal a continuation lower.

Security: TLT
Position: Hold

In November and December, the iShares 20-year T-Bond Fund (TLT) moved from below 88 to above 92.5. The bond exchange traded fund (ETF) met resistance around 92.5 in late December and again in mid-January 2006. This looked like a normal consolidation within an uptrend, but TLT proceeded to break support at 90.75 with a gap-laden decline at the end of January. A negative divergence in MACD accompanied the twin peaks at around 92.5 and momentum is now negative.

FIGURE 1: TLT. TLT formed a rising trendline (in magenta).

Graphic provided by: MetaStock.

The sharpness of the decline, support break, and gap indicate that this was a trend-changing event. TLT became short-term oversold around 90.5 and then consolidated over the last few weeks. Oversold conditions can be eased with a bounce or a consolidation. TLT did a little of both and formed a rising flag (magenta trendlines, Figure 1). This is a bearish consolidation pattern, and a move below last week's low (90) would signal a continuation lower. The initial downside target would be the November low around 88.

Trading has been quite volatile within the flag as the bulls and bears slug it out. TLT formed a long white candlestick on February 3 but did not follow through (green arrow). After a small decline, TLT bounced off support at 90 with another long white candlestick (gray arrow). The bond ETF again failed to follow through and formed a long black candlestick on Friday. There is clearly a battle raging within this consolidation, and I will be watching the boundaries to identify the winner. The bulls win on a break above 91.5 and the bears win on a break below 90.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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