Treasury Bonds May be Poised for a Fall

Tuesday, 27 Sep 2011 08:44 AM

By Rick Pendergraft

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One of the benefits of Technical Analysis and of Sentiment Analysis is looking for patterns that repeat.

Right now there is a pattern in the 30-year Treasury bond that looks very familiar. Over the last five months, the iShares Barclays 20+ Year Treasury Bond Fund (TLT) has jumped more than 36 percent.

This is an impressive move especially when you consider all the political turmoil in Washington and how the debt situation is weighing on investors.

Even with S&P downgrading the credit rating of the U.S. Treasury, the bonds have risen sharply as investors have been seeking safety.

The problem is that the TLT reached the $123 level last week and this is the area that served as the all-time high for the fund back in December  2008. You may recall that this was another period where investor fear was running high.

What is surprising to see is that in spite of the runup in bond prices, the Commitment of Traders (COT) report shows that large speculators have been shifting from an extreme bearish position to a more neutral position and have yet to reach a net bullish position.

The COT report from last August shows a similar pattern and that was right as the TLT peaked. From August 2010 through February 2011, the TLT lost over 16 percent.

Based on the pattern in the chart and in the COT, I would look for the TLT to pullback sharply during the next six months.

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