Many Short-Term Reversals – But Are They Trend Reversals?

Sy Harding:  According to popular opinion the Fed’s QE2 decision last summer, in which it would become a major buyer of new bonds being issued by the U.S. Treasury, would be a big positive for bonds.

But instead, as shown in the top chart, bonds, which had been in an uptrend, rolled over to the downside when the QE2 program began.

As we showed you at the time, our indicators triggered a sell signal on bonds and we took what turned out to be a profitable downside position in the ProShares Short 20+ Year Treasury ETF (NYSE:TBF). Our indicators were showing that in spite of the heavy Fed buying, money was flowing out of bonds overall, and a downside trend reversal was taking place.

Bonds eventually (in late January) seemed to find support at a trendline drawn through their lows of the previous three years, and we took our profits from the downside position, even as popular opinion had turned extremely negative for bonds, given an extra push in that direction by the announcement by Bill Gross that he had sold all treasury bonds from his large PIMCO Total Return Fund.

And now, as we’ve been showing you for the last couple of months, we’ve been on a new buy signal for bonds since February. Again the signal is contrary to popular opinion.

But popular opinion is usually based on looking out the rear window at the direction that has been underway and extending it in a straight line into the future, and trying to guess the effect that expected events will have on markets. We prefer to let money flows, support and resistance areas, momentum reversals, etc., tell us what a market is actually doing, which way money is actually flowing.  

51411a

As with all trend reversals, changes show up first in the short-term charts, and did so with the upside reversal in bonds. iShares Barclays 20+ Year Treas Bond ETF (NYSE:TLT)

51411b

Obviously, intermediate-term trend reversals must start with short term reversals.

But short-term reversals are most often just that, short-term, and have no significance for the intermediate-term. In fact, in rising markets short-term dips are most often buying opportunities, while in corrections, short-term rally attempts are most often opportunities to sell more heavily.

Yet waiting for reversals to obviously be of intermediate-term significance often means losing out on much of the early gains. For instance, we already have a 5% profit on the buy signal for bonds, a sizable move for bonds, that we were most influenced on by the short-term upside reversal. And this weekend we are finally seeing a number of analysts turning positive on bonds because of what they’re seeing in the intermediate-term charts.

So, when short-term reversals, either up or down, take place, they can be significant or not, and determining the difference can make a meaningful difference in the profit.

With bonds we allowed the short-term indicators to have more influence when they reversed to the upside, even though intermediate-term indicators had not yet reversed to buy signals, because bonds appeared to have found important support on the intermediate term charts, and were intermediate-term oversold beneath their 20-week moving average.

Using intermediate-term indicators and more in-depth tools and analysis to determine whether short-term reversals are of importance, or not, has taken on some current importance with the short-term reversals, both to the upside (the U.S. dollar) and to the downside (gold, commodities, the stock market) over the last two weeks.

51411c

51411f

51411d

51411e

The short-term charts are not revealing whether the reversals are the beginning of a longer-term trend reversal or not. A lot of guessing going on.

Global Markets Still Not Happy.

If it isn’t one thing it’s another that has kept important global markets topped out since November.

If it’s not concerns about rising inflation, it’s concerns about economies being slowed by the monetary and fiscal tightening they’ve undertaken to fight back at inflation. No sooner do falling commodity prices provide an opportunity for inflation fears to subside, than the European debt crisis returns with even more dire projections that it is spreading.

51411g

51411h

51411i

Written By Sy Harding From Street Smart Report

Sy Harding is editor of the Street Smart Report, and the free market blog, www.streetsmartpost.com.  The Street Smart Report Online includes research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.  It provides two model portfolios as guides. One is based on our Seasonal Timing Strategy, one on our Market-Timing Strategy.

Leave a Reply

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