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Author: globalist2013 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35365  
Subject: Trading TLT Date: 1/14/2013 1:06 PM
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Several analysts are arguing that going long the long bond is still a viable trade. They argue that ‘price’ --not the current low coupons for Treasuries-- is the important fact, and they expect prices to rise, creating cap-gains. If they are right, going long the long bond --perhaps via an ETF like iShares Barclays 20+ Year Treas Bond, (TLT)-- isn’t the only way the trade could be expressed. Stocks could be shorted, as the linked, 3-month chart suggests, for an equivalent effect. http://finance.yahoo.com/echarts?s=TLT+Interactive#symbol=tl... But let’s see if the trade could be put on as they suggest it. So let’s create a quick-n-dirty trading system for TLT.

Charts for stocks, ETFs, and mutual funds can be created at several places on the web. But the best place is www.stockcharts.com. They offer a rich feature set, plus the ability to create linkable charts. So let’s do our work there for today. This is what a default chart for TLT would look like. http://stockcharts.com/h-sc/ui?s=TLT&p=D&b=5&g=0... That’s messy, incomprehensible crap, right? So let’s clean it up. The first thing to do is to get right of the moving averages. http://stockcharts.com/h-sc/ui?s=TLT&p=D&b=5&g=0... That’s way better, right? Next, get rid of the garbage at the top and bottom of the chart. http://stockcharts.com/h-sc/ui?s=TLT&p=D&b=5&g=0... Even more better, right? Now you’re looking at just a bare, price-volume chart. But further things still have to be done. What you’re now looking at is six months of daily prices, which isn’t a bad place to begin. But what you really need is the overview provided by a longer time frame. That can be obtained by switching to weekly bars. http://stockcharts.com/h-sc/ui?s=TLT&p=W&yr=3&mn...

That’s a scary chart. Look where present prices are in terms of their prior path. Clearly, a price around 120 was prior resistance, and it is current support, and something around 125 is current resistance. Said another way, for the trade that Schilling and Bianco are advocating to work, prices for TLT have to go higher. But that’s not a long-term bet I’d be willing to make. My bet is that what you’re seeing in the chart is the completion of the ‘head’ of a ‘Head-and Shoulders’ formation [look it up] and that prices are getting ready to fall. In yet further words, Schilling and Bianco are advocating a very risky trade.

OK, keep that thought in mind and drop down to a shorter time frame. http://stockcharts.com/h-sc/ui?s=TLT&p=D&yr=0&mn... Now, let’s start slapping some indicators on that chart, and here’s one that will drive you crazy with its complexity. http://stockcharts.com/h-sc/ui?s=TLT&p=D&yr=0&mn... That’s almost an incomprehensible mess, right? But pay attention to the colored clouds and what they are predicting, that prices will be going down, not up, which is the opposite of what we need for the trade to work. An aside: Inchimoku Clouds have an interesting history, and they are widely used by Japanese Forex traders. https://www.ichimokutrade.com/articles/Ichimoku_Ebook.pdf

OK, enough exotics. Instead, slap on Keltner Channels, but cut their default parameters in half. http://stockcharts.com/h-sc/ui?s=TLT&p=D&yr=0&mn... Now, we’re starting to get stuff that makes sense. The channels are based on ATRs [look it up]. But their meaning is this. When prices become volatile, they move outside the channels, to the upside or downside, and those movements become buy or sell signals. E.g., take a look at the price action at the early part of this year. That’s exactly where you would like to have been buying, right? Now, let’s see if we can get confirmation from applying other indicators, and this time, I’ll cut to the chase and simply give you the chart as I’d set it up. http://stockcharts.com/h-sc/ui?s=TLT&p=D&yr=0&mn... I’d trust the trading system implied by that chart, and its translation is this. Do NOT do any buying unless/until you see the following two things happen:

(1) Prices are BELOW the midpoint of the Keltner Channel and --preferably --outside the lower channel. (In other words, you’re trying to buy cheaply when fear --hence, ‘information-risk’ -- is the greatest, but ‘price-risk’ is the least.)
(2) Money has started to move back into the stock. (In other words, somebody is doing some buying, and the bet has to be that it is the smart money.) CMF tells you that, and CCI and StochRSI confirm it.

Obviously, if you want to use this setup responsibly, you’ll look up each of the indicators and work through their formulas to see how there are derived, as well as apply this setup to lots of other stocks to see where it works well and where it fails. Because it’s going to fail in some places. Nothing works every time, and every indicator is simply a derivation of the two facts of price and volume, and who knows what kinds of crazy things the market will do in response to who knows what kind of crazy news will come its way? All you’re trying to do by drawing pictures is to get a sense of how buyers and sellers are responding to the info available to them and how they are translating their opinions into decisions that leave what amounts to footprints that you are trying to track the way you’d track a deer or a cougar in the forest. The task is no different, and what you’re trying to do is get yourself set up for the shot. It might never happen. Prices might not come your way. But if/when they do, you’re ready to execute.

Charlie
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PS Also, obviously, to use this set-up responsibly, a whole bunch other things have to be done. Position-size (relative to one's account) has to be determined, as well as whether one goes 'all-in' or 'scales in', as well as setting loss-points and profit-targets at which the trade will be pulled or closed. And make no mistake about it, this is a 'trade', not an 'investment'. You're going to get in, and then get out. The 'investing' part comes from having a clear-cut plan that guides your actions as you put capital at risk with the rational expectation of appreciating it. 'Hope' plays no part in your plan. You've done your homework.
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