A research paper by Ben Jacobsen and Cherry Y. Zhang of Massey University of New Zealand demonstrates that monthly seasonality effect is sample specific. They found that the strategy of ‘Sell in May and Go Away‘ beats the market more that 80% of times over -year horizons. Another aspect of this strategy is that during this time, bonds usually outperform the equities. With that in mind, lets take a look at some emerging patterns in U.S. Treasury Bonds.

Diverging Asset Classes

Chart 1

The four asset classes, bonds, equities, commodities and U.S. dollar are diverging (Chart 1). Equities are in an uptrend, U.S. dollar is in a down trend and bonds and commodities are reversing trends.

The 30-Year U.S. Treasury Bond prices mostly declined from July 2016 to the year end. In 2017 they mostly moved sideways (Chart 1 Tope Panel). Now, the bonds, $USB, are showing signs of an imminent reversal. The bond prices are trying to break above a down trend line that has been in effect since July 2016 high of 176.06. The price first tried to break above the down trend line in mid-April only to fall back below it a week later. The current attempt to break above the trend line began in the second week of May and the next resistance is the April 2017 high of 154.40.

Equities, S&P 500, has been in an uptrend since bottoming at 1829.08 in February 2016 (Chart 1 Second Panel). The price touched the uptrend line almost twice since then – once in June 2016 and then in November 2016. The pullback from the recent high is still above the trend line.

Commodities, Reuters/Jefferies CRB Index, $CRB (Chart 1 Third Panel) made a descending triangle pattern between June 20016 and February 2017. Its reached a high of 195.88 in June 2016 and 196.36 in January. The lows in August 2016 and November 2016 form the lower limit o the triangle. In April it broke below the symmetrical triangle but since then has bounced back up. At this moment it attempting to break above the down trend line though it is also facing a resistance at the same level.

U.S. Dollar index reached the highest level 103.81 since 2003 (Chart 1 Fourth Panel). Since that high it has been declining. It is making lower highs and lower lows below a downtrend line. It is not showing any signs of consolidation or reversal at this moment.

U.S. Treasury Bond Yields

Chart 2

The US 30-Year yields, $TYX, are giving us another perspective (Chart 2). They reached the highest level, since June 2015, of 3.19% in December 2016. Yields again reached 3.201% in March 2017. In early April, yields broke below a lower limit of an ascending triangle. It subsequently tried to regain the lost ground but that attempt seems to have failed in the second week of May. The target of the pattern is near 2.60-2.70% level. In November 2016, yields gapped up, that gap may act a s a support, which is between 2.74% and 2.64% level.

Weeklies Forming Bearish Patterns

Chart 3

Chart 4

Since November 2016, $TYX has been trading within a horizontal channel – bounded by 3.197% at the high end and by 2.902% at the low end (Chart 3). It tried to break below the lower bound in mid-April but hasn’t been successful yet. The yodels are still hovering at 2.90% level and break below that will complete the pattern with a 100% extension target near 2.60%.

The 10-Year Treasury Notes, $TNX, broke below an ascending triangle in early April (Chart 4). The subsequent attempt to reclaim the lost ground failed at the resistance created by the broken lower limit of the triangle. The high of the triangle is 2.621% and the low is 2.189%. The break down point is near 2.391%, giving us a target near 1.96% level.

Emerging Patterns In U.S. Treasury ETFs

TLT

TLT, iShares 20+ Year Treasury Bond ETF is making a mirror image of $TYX. In late-March/early-April, TLT broke above descending triangle (Chart 5). The height of the triangle is almost 6.54 points and the break out point near 121.19, which gives us a target near 127.75 level.

TLT then retraced and found a support at the broken upper-limit of the triangle, effectively forming an ABCD pattern. The 100% extension target of this pattern is 128.40 and the 161.8% extension target is near 133.65.

In November 2016, TLT made a down gap, which has created a resistance level between 129.71- 127.37.

UBT

The 2X leveraged ETF for TLT is UBT, ProShare Ultra 20+ Year ETF. It broke out of a symmetric triangle in March / April (Chart 6). The height of the triangle I 9.36 and the breakout level is near 75.65, giving us first target near 85.00. Like TLT, UBT also retraced after nearing 61.8% extension of the pattern to the broken upper limit of the triangle, thus forming an ABCD pattern. The 100% extension target of ABCD is near 84.31 and 161.8% extension is near 87.07.

Chart 4

Chart 6

AGG and IEF

Two other ETFs, AGG, iShares Core U.S. Aggregate Bond and IEF, iShares 7-10 Year Treasury Bond are making similar patterns. These two move in smaller range than TLT.

AGG broke above a horizontal channel in second week of April. The height of the patterns is 1.87 and the break out point is near 107.07, giving us a target near 108.93. Then AGG retraced into the channel, forming an ABCD pattern. The 100% extension target of the pattern is near 110.96 and the 161.8% extension target is near 112.58.

IEF broke out of an ascending triangle in April. The height of the pattern is 2.60 and the breakout is near 106.03, giving us a target near 108.63. IEF, then retraced below the upper limit of the triangle, forming an ABCD pattern. The 100% extension of ABCD is near 10918 and the 161.8% extension is near 111.51.

Chart 7

Chart 7