Is the Bond ETF Breakout for Real?

Simultaneous with bond yields cooling dramatically from the highs that rattled investor sentiment earlier in the fourth quarter, the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) has staged a comeback from its Nov. 2 four-year closing low of $112 (at which point the exchange-traded fund was down 11.7% on a year-to-date basis). A Dec. 4 bull gap launched the long-term Treasury tracker above its 80-day moving average, and TLT has more recently mounted a successful challenge of its 320-day moving average, having closed five of the last seven sessions above this trendline -- including a non-trivial weekly finish last Friday.

TLT's takeout of its 320-day is impressive, given that this moving average provided stiff resistance during the latter half of January, and then proceeded to reject the bond ETF's July highs. And investors are responding by shifting back into TLT; after steady outflows through the first half of December, a burst of inflows began on Dec. 18, ultimately yielding net inflows of $218.91 million for the month-to-date period, per etf.com data.

Options data points to a similar burgeoning enthusiasm toward TLT. As of Friday, total put open interest had cratered to 561,340 contracts -- a figure that registered in just the 4th annual percentile, pointing to a remarkably slim presence on the part of put players. Comparable TLT call open interest -- at 703,157 contracts, in the 68th percentile of its annual range -- is considerably healthier.

And in fact, as of Friday, TLT's 30-day at-the-money implied volatility skew was plumbing new annual lows around negative 18%. This bottom-lines to the fact that options traders have rarely paid up a greater volatility premium for TLT calls over puts in the past year, underscoring the higher relative demand for calls at the moment.

But just over a week out from TLT's Dec. 20 intraday high, which carried the share price within about 1 point of a 10% rally from its Nov. 2 multi-year lows, it's important to observe that the bond fund still has some major technical hurdles overhead -- including a trendline connecting its higher lows dating back to September 2017, as displayed by the red dashed line on the accompanying chart.

This trendline is currently located just overhead, around $121.50, and has yet to be toppled on a daily closing basis amid TLT's breakout "comeback rally" of the last two months. And for what it's worth, a prolonged challenge of this trendline back in December 2017 ultimately resolved in the form of additional downside action (in the form of a peak-to-trough sell-off of more than 9%, to be specific).

So, before joining the recent crop of bulls who have piled onto the bullish TLT bandwagon, we'd advise watching the ETF's progress around this "hidden" trendline. Rather than a buying opportunity, another rejection here could provide an opening for a short-term bear play on the bond fund.

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, December 30.