ETF Charts: Trading The iShares 7-10 Year Treasury ETF (IEF)

Scott Pluschau:  The iShares 7-10 year Treasury ETF (NYSE:IEF) has been forming an immature balance area in the weekly time frame. Tuesday, September 6th, 2011, IEF gapped up to a new 52 week high and closed down on the day. I marked this with a grey oval on the Daily chart.

In Japanese Candlestick Analysis today’s price action on low volume formed what is known as a “spinning top”. A spinning top candle shows buyers and sellers becoming more balanced, and being that IEF was making the initiative move to new 52 week highs; this “could” indicate that the trend is losing steam. I am very hesitant to short here with the responsive trade due to the fact that the prior trend is up, and the path of least resistance is clearly higher, however from an Auction Market Perspective, trading off the extreme of the balance area is a “low risk” trade. The market has found value currently in this range for a few weeks. Price discovery at higher levels was initially rejected.  The stop is now placed above the high of the extreme, only after we have seen some fizzle on a failed breakout, and you then target the opposite side of the balance area normally. The responsive trade will typically retrace the width of the balance area in a fraction of the time it took to form it. Low risk also means with the correct money management. Can your account handle being wrong ten times in a row on a trade setup like this? I am not focused on “jackpot” here; rather I am focused on “positive expectancy” to the trading system over the long run. This has nothing to do with timing the top in bonds. Randomly selling something just because it is “too high”, or trying to catch the high tick, is a recipe for disaster.

I would like to see IEF close today Wednesday September 7th, 2011, below yesterday’s low.  I am planning on taking a very small position to the short side, with the intention of possibly adding to the trade “only” if we should get a breakdown of this weekly balance area that is forming, at approximately $102.50. At that point I will be setting my initial target at a prior support and resistance level of $97.50. The next target after that is approximately $92.50 which is the top of a prior mature balance area where there should be strong support.

My trade plan is as follows: I have identified the current balance area that is forming using Auction Market Principles as my guide. I have found a favorable responsive trade location from the extremes of the balance area, only after a poor breakout attempt on low volume. There is a potential single Japanese Candlestick reversal pattern. I am defining my initial risk. I am using correct position sizing. I am either getting stopped out for a small loss, or I am implementing further trade management by adding to the position at a specific movement in price.  Lastly I have set profit taking targets. It all depends now on execution. Enter the next step of psychology and discipline.

Written By Scott Pluschau From ETF Digest  

Scott was a financial advisor with Citi. His technical analysis report was recently featured by Dr. Marc Faber on the Nasdaq Composite Index in his June 1, 2011 Gloom Boom & Doom report. Scott earned his degree in Accounting and Taxation from Pace University. He lives in Long Island with his wife Ilona, daughter Olivia and new baby Henry.

ETF Digest writes a subscription newsletter focused on technical analysis of exchange-traded funds. ETF Digest was founded in 2001 and was among the very first to see the need for a publication that provided individual investors with information and advice on ETF investing.  Even if you’re not a fan of chart analysis, ETF Digest provides insight and commentary into which global markets are “working” and why.

Leave a Reply

Your email address will not be published. Required fields are marked *