The iShares 20+ Year Treasury Bond ETF (TLT) may have completed a correction after the first quarter surge to an all-time high and will likely post even higher highs in coming months. That could spell trouble for the U.S. and world economies because the Fed's bond buying spree was designed as a stopgap against fallout from the coronavirus pandemic. New highs in the long bond would signal that those efforts have failed, requiring much a much longer intervention period.

The rally would also raise the odds for negative interest rates that reflect historically low demand for capital because companies are trying to survive rather than grow through investment. Those rates would also undermine money markets and saving accounts, making cash work less productively at a time that equity investments are generating steep losses. And most importantly, it's a bottomless pit, with Germany, Japan, and other countries failing in their efforts to lift rates above 0% after years in negative numbers.

TLT Long-Term Chart (2009 – 2020)

Long-term chart showing the share price performance of the iShares 20+ Year Treasury Bond ETF (TLT)

The bond fund entered a strong uptrend in the first quarter of 2011, rallying off support in the upper $80s. A 2012 breakout above the 2009 high at $123 made limited progress, topping out at $132 in the third quarter of 2012. A proportional pullback into 2014 posted a higher low at $101, ahead of renewed buying interest that reached the prior high at the start of 2015. It broke out immediately but added just six points before reversing once again into mid-year.

The turnaround posted the third point of a rising trendline starting at the 2009 peak. The fund added a fourth point in 2016 and entered a longer-term downtrend, losing ground into November 2018's four-year low at $112. The subsequent uptrend attracted strong buying interest, reaching 2016 resistance in August 2019, but an immediate breakout also failed, yielding a pullback toward $135 at the start of 2020.

Price action into February completed a four-year cup and handle pattern, ahead of a vertical breakout after the Fed issued an emergency rate cut and took other measures to keep a floor under the U.S. economy. The fund broke out above the 10-year trendline in the first week of March, setting off high volatility and a vertical surge into the all-time high at $179.70. A violent whipsaw off that level ended at $139, establishing a trading range that has contained price action into the second half of the second quarter.

The March flip-flop marked a successful test at the breakout level and 200-day exponential moving average (EMA), confirming new support that has now risen to $151. The monthly stochastic oscillator has issued mixed signals at the same time, crossing lower just before reaching the overbought zone. However, similar to the summer of 2016, downturns at this level often generate false signals before rally waves cross the barrier and set off fresh buy signals.

TLT Short-Term Chart (2018 – 2020)

Short-term chart showing the share price performance of the iShares 20+ Year Treasury Bond ETF (TLT)

The decline reversed at the .50 retracement of the 2018 into 2020 uptrend, while subsequent price action settled above the .382 retracement level. A Fibonacci grid stretched across the downdraft places the bounce into April 21 at the .786 sell-off retracement, while the subsequent pullback has held the narrowly aligned .50 retracement and 50-day EMA. Taken together, a rally above $171 would now issue a fresh round of buying signals while favoring a test at the rally high.

The on-balance volume (OBV) accumulation-distribution indicator has matched price action in the past few years, dropping to a three-year low in December 2018 and entering an accumulation phase that matched minor price breakouts. OBV surged to an all-time high with price in March and has carved a more sedate pattern into May, holding close to the first quarter peak. This tells us that few share or bondholders are taking profits at this time.

The Bottom Line

The long bond fund may have ended a two-month correction and could challenge rally highs in coming weeks.

Disclosure: The author held no positions in the aforementioned securities or their derivatives at the time of publication.