Are Bonds out of Mr. Rogers’ Neighborhood?

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Last evening, iBankCoin Financial News reported that Jim Rogers had essentially called a top to the secular bull market in bonds. Rogers is never one to shy away from giving his opinion, but it is worth noting he has had success in commodities more than any other asset class. If he is correct this time, then you would expect the chart of TLT to go parabolic and then crater, as would be consistent to the grand finale of most secular bulls. Now, on the monthly chart (2nd chart below) we can see how steep the recent move has been, directly into those 2008 highs. Bonds have since stalled there, but they have not yet cratered like they did a few years back. Incidentally (or not), this is about when stocks were in the process of making a major bear market bottom.

Despite the temptation to extrapolate the 2008 coming-around-the-mountain scenario to the present, the daily chart of TLT has seen no real signs of a violent sell-off after the steep run. Instead, I would argue the recent pullback has been rather orderly and quiet. Keep in mind, TLT has not tested its rising 50 day moving average since late-July. All of that is consistent with a pullback within an ongoing uptrend. I know I am simplifying things a bit here with the ETF, but the volume is also not indicative of some type of heavy selling event at a major top.

Since everyone is a contrarian these days when it comes to stocks, the trade that might frustrate the majority would be to see bonds commence another major leg higher.

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10-minute chart of the SPY shows a pretty clear cup and handle. As steep as most the daily charts of the indices look here, the smaller timeframes compose the longer-term timeframes in aggregate. The bears have defended 1220 on the S&P 500 thus far this week, but the more time it is tested the more likely it is to give way to an upside breach. I am not ruling out headfakes either, but above all else the idea is to resist the urge to short this market all the way up.

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Each consolidation that we have seen has been rather tame, which makes it tough to embrace the bear case here. Below, the 30-minute chart of the SPY stretching back to last week’s reversal shows a pretty solid trend, with us consolidating just under major resistance of that multi-month trading range. A few names like CHKP GBX GRMN have my interest in terms of reasonably tight individual setups, and I am doing my best to stay nimble here without getting married to a thesis. I recognize that plenty of traders are still looking for a pullback here, which may very well be negating the possibility of it happening now. However, the energy in today’s move higher is lackluster and not exactly inspiring me to throw in the towel and chase.

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The V-shaped nature of the rally since early last week’s false breakdown is persisting this morning, with the Nasdaq Composite Index gapping up to multi-month highs. To be sure, the steep angles of ascent on many charts make finding low-risk entry points a difficult task. Beyond that, the S&P 500 found resistance up at the very top of the 1120-1220 trading range today, as it did on Wednesday. For bulls and bears, the traps have been vicious and cruel, albeit sloppy like an amateur designed them.

With the market is as flaky as it has been, I am still largely focused on protecting the lion’s share of my capital. I am starting to see charts firm up here and there,  such as the important transportation stock UNP. However, it would not surprise me to see most charts put in more base building work.

2011 has been a year largely characterized by challenging the discipline of traders with all types of styles, given how many times the character of the market has changed this year. With the fourth quarter well underway, not much has changed in that regard, given the V-shaped bounce off of the lows. At some point, though, the picture will clear up and trend traders will be able to pounce on opportunities without feeling as though they are walking on eggshells to skirt a homemade trap.

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It is tough for me to list a set of long trading ideas given the menacing shooting star candle which remans valid on the SPY daily chart. There is a huge psychological ping-pong match happening right now, where just about all market observers recognize that we have been in a trading range for several months. While there are still plenty of sloppy charts out there, the contrarian in many traders is telling them to look for a breakout form the range in no time, because that will supposedly frustrate the greatest amount of market participants, as the market is prone to do.

I can appreciate that type of thinking, but at the end of the day price is going to trump perceived sentiment. To be clear, if I saw more high probability setups I would be inclined to jump all over the contrarian case of breaking up and out of the 1120-1220 trading range on the S&P 500. Indeed, that may very well happen soon. As an example, looking at the charts of LED firms RBCN and VECO below, you can see just how absurd those downtrends are starting to become. Even if those firms are actually going to go out of business eventually, their stocks are bound to see a bonafide sharp rally (or two) to at least the 50 day moving average.

In the meantime, though, if you flipped the chart of the SPY upside down, you would see a steep decline followed by a prominent gapping inverted hammer. A question to consider: In that scenario would you consider it wise to aggressively play for further downside? The correct risk/reward strategy would be to lighten up on shorts and respect the idea of at least a short-term bottom. Flipping that scenario back to the current one, we have seen a very steep, if not historic, rally over the course of a week, followed by a shooting star candle. The idea would be to lighten up on longs if you were in heavy, out of respect for at least a short-term top.

A few days of firming up charts can quickly flip the landscape back to a high probability scenario for longs, but until that happens I am going to respect risk and price action over a tempting contrarian play.

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