Bonds Heading Higher

I wrote about interest rates two weeks ago, saying:

“After hitting the oversold level three separate times, the Relative Strength Index (RSI) on 30-year bonds is now trending higher. At the same time, bond prices have continued to drift lower. That’s called positive divergence and it’s usually an early indication that prices are mounting a bullish turnrnaround.”

And here’s the chart I shared, with the vertical white line showing the day I wrote:

See larger image

Now, in good faith, I can’t give full credit to technical analysis or myself for calling the turnrn so precisely. The Fed’s “no taper” announcement surely had an effect, with Wednesday’s advance marking the strongest day in the last two weeks. But my analysis gets some of the credit, too.

Yet I raise the topic again because that’s only the short-term view. Here’s the big picture: 30-year bond futures going back to 2002…

See larger image

The big bond selloff that everyone’s talking about… it began in late May! I’ve highlighted that and each month thereafter in pink bars above.

So as you can see bond prices have been in bull mode for many years. And the decline that began in May now looks more like a shallow pullback than a troubling drop.

August’s lows – nearly equal to September’s lows – hit right at the 50% Fibonacci level, based on the latest upswing that began early 2011. This is a typical pullback zone, allowing prices to “catch their breath” before the dominant (up) trend continues on.

While the positive (bullish) divergence I wrote about two weeks ago gave us an early indication of rising prices, we should see confirmation of the bullish turnrn by month’s end.

I’m looking for a close that exceeds August’s close (132)… but ideally 30-year bond futures will close out September above August’s high, at nearly 134. Once I see that, I’ll feel more confident that new highs are on the horizon.

A move up to the July 2012 high of 149 would be an 11%, or roughly $15,000, profit per futures contract.

Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.