TheTechnicalTake: TBT

By Guy M. Lerner
www.thetechnicaltake.com

I would describe the current price action in the equity market as meaningless. It
doesn't impart any information to me as the dip is always bought albeit on
persistently shorter and shorter time frames. On the other hand, long term
Treasury yields are on the rise and breaking out from their current trading
range. Rising yields will be a headwind for equities, and are likely a sign of
inflation worries.

Figure 1 is a weekly chart of the UltraShort Lehman 20 + year Treasury (symbol:

TBT). This 2x leveraged ETF moves in the direction of Treasury yields. The pink
labeled price bars are negative divergence bars; in this case, the divergence is
between price and a momentum oscillator that measures price. Negative divergence
bars are a sign of slowing upside momentum, and typically the highs and lows of these
price bars will lead to range bound trading until prices break out. It appears that
prices on the TBT are set to close above the highs of the most recent negative
divergence bar (look for blue arrows on graph). Often times, this leads to an
acceleration in prices as traders, who are short, cover their losing positions.

Figure 1. TBT/ weekly

Adding credence to the "breakout" is the relative strength indicator in the lower
panel. This is leading price higher. Lastly, the break of the long term down sloping
trend line is quite noticeable. A weekly close below the lows of the recent negative
divergence bar at 37.78 and below the down sloping trend line would invalidate the
set up (making it a fake out).
Figure 2 is a daily chart of the TBT. The inverted head and shoulders bottom is easily
seen with a breakout at $37 that occurred well over a month ago. Support held at
$37. The width of the base (i.e., inverted head and shoulders bottom) is 7 TBT
points, and adding this to the breakout level gets a price target of $44 for the TBT. I
have highlighted the gap at $45; this is good enough for government work.

Figure 2. TBT/ daily

I have been hyping rising long term Treasury yields since October, 2010. I believe this
represents a headwind for equities. This is a sign that investors are increasingly
worried about inflation. Typically, yields rise with an improving economy, but so does
the employment rate. As we found out today, the employment picture is far from
pretty.