|Figure 1 shows the long-term analysis of the iShares Barclays 20-Year Treasury Bond ETF (TLT). On the price chart, shown in the lower panel, is plotted the 200-day linear regression line along with its upper and lower channel lines in green. The middle line is the linear regression line and acts as a price magnet. Whenever price moves too far from this line, it is always pulled back to it. The upper channel line acts as resistance to price and the bottom channel line acts as support. Note that in early November 2010, price broke down below the support line, signaling the end of the long-term uptrend in bonds. |
The standard error indicator is a measure of how far price has wandered from the linear regression line and is a measure of volatility. Note that the standard error indicator is above its linear regression line, labeled LRL on the chart, and continues to move upward. This is an indication that price is still moving away from the 200-day linear regression line on the price chart.
The linear regression slope indicator is a measure of the current slope of the linear regression line. Note that this indicator has peaked and is now moving lower but still remains above its zero line. This is an indication that over the long term, price is starting to decelerate. Thus, the linear regression slope indicator is also a statistical momentum indicator. Note also that his indicator remains above its zero line. Price deceleration normally occurs just before a reversal in trend. Thus, the linear regression slope indicator is telling us that price is decelerating over the long term but has not yet reversed its long-term direction from up to down.
The R-squared indicator is a measure of how closely price sticks to the linear regression line. When price sticks close to the linear regression line, price is considered to be in a strong trend and the R-squared indicator moves higher. However, when the R-squared indicator moves down, it is an indication that the long-term uptrend is weakening, as it is doing now.
The long-term analysis shows that bonds remain in a weakening uptrend. As confirmation of this analysis, I have shown the 200-day simple moving average of price. Note that price is also below its moving average.
|FIGURE 1: TLT, DAILY.This chart shows the 200-day linear regression channel on the price chart in the bottom panel, the linear regression slope indicator in the top panel, the R-squared indicator in the second panel, and the standard error indicator in the third.|
|Graphic provided by: MetaStock.|
|Figure 2 is that of the intermediate-term analysis of the bond market. In the bottom panel, I zero in on the red downsloping linear regression channel. This linear regression channel shows the 50-day linear regression line and its upper and lower channel lines. This analysis shows that over the intermediate term, the bond market remains in a strong downtrend, and here's why:|
First of all, the linear regression slope indicator is below its zero line, indicating that over the intermediate-term bonds are in a downtrend. Note, however, that the linear regression slope is currently moving sideways. This tells us that over the intermediate term, the price of bonds is no longer accelerating to the downside but continues to move lower at a constant rate. This also tells us that the intermediate-term downtrend is closer to its completion than its beginning. This does not, however, insinuate that a new long-term uptrend lays ahead. It could indicate that an intermediate-term upward correction lays ahead, which could then be followed by another downward leg.
Second, the R-squared indicator is at 0.87, indicating a very strong trend.
Third, the standard error indicator is now at very low levels, indicating extremely low volatility. Low volatility tells us that price should continue to move lower. High volatility is a sign of change in trader psychology and most often leads to a change in trend.
|FIGURE 2: TLT, DAILY. This chart shows the 50-day linear regression channel on the price chart in the bottom panel, the linear regression slope indicator in the top panel, the R-squared indicator in the second panel, and the standard error indicator in the third.|
|Graphic provided by: MetaStock.|
|In conclusion, over the long term, the bond market continues to weaken and will most likely ultimately turn lower. Over the intermediate term, the bond market is already in a mature downtrend. However, all indications suggest that this downtrend will continue for the immediate future. However, there is a warning of an intermediate-term upward bond market correction laying somewhere ahead. Once the intermediate-term R-squared indicator starts to turn down and the standard error indicator turns upward, that will be a sign that the intermediate-term upward correction in bonds is about to begin.|
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