Watch The 20+ Yr Treasury Bond ETF For Clues To Likely Stock Reversals? (TLT, SPY, IEF)

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July 17, 2010 5:00pm NYSE:IEF NYSE:SPY

I’ve been pointing out to members of the Weekly Intermarket reportthat just prior to major market downturns, we have seen either a breakout in the iShares Barclays 20+ Yr Treas.Bond ETF

 (NYSE:TLT) or a strengthening in the fund while the SPDR S&P 500 ETF (NYSE:SPY) held up, just before a sharp fall.

This is the third such instance in the last few months, the others being:

The (NYSE:TLT) broke and gapped sharply higher on Tuesday, May 4th – 2 days prior to the “Flash Crash”

The (NYSE:TLT) broke out again from key resistance during the June 22 market turn

And now, let’s look at the current “Pre-Crash” signal the (TLT) gave us in the last couple of days:

Look closely to see that the (NYSE:TLT) ETF bottomed on June 13th when the (NYSE:SPY) ETF hit the key $110 level.  Nothing unusual about that.

What WAS unusual was that (NYSE:TLT) began to move clearly higher on July 14th while the (NYSE:SPY) stagnated at the highs, forming a double-top pattern on massive negative market internal divergences, as I highlighted in the NASDAQ at the time.

We now see the expected sharp downside resolution the divergences forecast.

But we also got a warning from (NYSE:TLT) as well.  So, on July 14th, the (NYSE:SPY) was flat while (NYSE:TLT) rose sharply higher.

The big clue came Thursday, when the (NYSE:TLT) broke sharply higher as the (NYSE:SPY) turned lower (expected) but rallied on BP and GS news into the close… but (NYSE:TLT) held its gains.

Thus, the (NYSE:SPY) and (NYSE:TLT) being up after a (NYSE:TLT) breakout was another ‘big caution’ signal of a potential market reversal.

And today?  Big market reversal.

We can never know exactly when the market will reverse, but we can look “under the hood” at situations that have been known to form prior to reversals, such as massive market internal divergences and breakouts in (NYSE:TLT) or the iShares Barclays 7-10 Year Treasury (NYSE:IEF)

I actually highlighted the (NYSE:TLT) and ETF breakout from June that called the market reversal at the time in the post:

“Bond Funds IEF and TLT Nearing Key Breakout”

As a reference, here is the current chart of the (NYSE:TLT) that showed a bounce higher off support as the stock market came into daily resistance:

Though (NYSE:IEF) actually bounced right off the rising 20 day EMA, the (NYSE:TLT) dipped one day under the $99 level, but came back very sharply as seen above on Wednesday, Thursday, and today.

Pullbacks to support in the bond ETFs, or breakouts (such as that which occurred at the START of May and end of June) are often key signals that the stock market is likely to turn lower – or at least that’s been the recent development lately.

Either way, it pays to watch the (NYSE:TLT), (NYSE:IEF), and other important bond funds (and bond prices themselves) in conjunction with market internal divergences and daily structure (overhead resistance, trend, etc) to anticipate potential stock market turns more accurately.

These are the kinds of insights I share with members either of the Idealized Trades daily or Intermarket Weekly membership services, which digs quite a bit deeper than I’m able to do on the public blog.

Written By Corey Rosenbloom, CMT From Afraid To Trade

My name is Corey Rosenbloom, CMT (Chartered Market Technician) trader, educator, analyst, and I am excited to share with you my experiences studying and trading the markets and to hear from you regarding your experiences, challenges, and frustrations, and successes. My goal is to create a community dedicated to reaching out to those who have been burned by the market or are anxious about risking their money to make money in the stock, options, or futures markets. Together, we can share strategies and learn how to overcome crippling fears that keep us from achieving our highest potential.

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