UGL, the leveraged gold ETF, rose 4.10%.  BOIL, the 3x leveraged natural gas ETF, gained another 3.46%.  SRS, the leveraged short real estate ETF, was up 2.95%.  It has been in a downtrend since August 2011.  Please click on the symbols for details.

Following up on yesterday’s discussion of the VIX and its relation to the Bollinger Bands, today it climbed to touch its +3 Standard Deviation Band.  Back in December, February, and April, it rose up to the +4SD Band before the market bottomed.  That doesn’t mean that today’s +3SD Band touch wasn’t a bottom, however.  The chart below, which you can make full-screen by clicking on it, shows today’s VIX action on the right-hand side of the chart under the red down arrow:

The lower half of the chart is the action in the SPY, the S&P 500 Index ETF, and you can see it opened near the low of the day and closed near the high of the day.  So with Memorial Day weekend coming up, is there a bullish or bearish seasonal bias for a pre-holiday trade?

Conventional wisdom is that the Pre-Holiday effect is a calendar anomaly in equities, the tendency for a stock market to gain on the final trading day before a holiday. Research shows that market return during pre-holiday days is often more than 10 times larger than the average return during normal trading days.

In a 2005 study done for the Federal Reserve Bank of Atlanta, Professor Peter Hanson of Stanford University along with two other authors studied the significance of calendar effects on 25 stock indices in 10 countries, including the United States.  The found they calendar effect to be statistically significant in almost all 25 indices.  Some of their strongest evidence was in small- and mid-cap indices.  They also noted that except for small-cap indices, beginning in the late 1980′s the calendar effect began diminishing.  You can read the paper here at http://www.atl-res.com/~nason/pdf/wp0502.pdf.

Research by Thomas Bulkowski, author of Encyclopedia of Chart Patterns, found differently, however.  He concluded that on average the U.S. markets do not close higher either the day before or after a holiday.  The exception to this rule is the days before and after Thanksgiving and Christmas.

Bulokowski tested 571 stocks from from January 1, 1995 to September 7, 2009.  He defined a bear market as when the S&P 500 Index dropped more than 20%, high to close, before reversing and climbing more than 20%.  This occurred March 24, 2000 to October 10, 2002, and October 11, 2007 to March 6, 2009.  Everything outside these periods he called a bull market.

Pre- and post Memorial Day holiday trading he found that in bull markets, pre-holiday the stocks closed higher 56.50% (lower 43.50%) of the time and post-holiday closed higher 48.40% (lower 51.60%) of the time.  During bear markets pre-holiday closes were higher 27.90% (lower 72.10%) of the time and post-holiday closes were higher 53.30% (lower 46.70%) of the time.

So, you pays your money and you take your choices.  We’ll know Tuesday afternoon how this Memorial day pre- and post-holiday trading worked out.  I’ll be gone tomorrow so I wish you a great holiday weekend.

TTT, the leveraged short Treasury bond ETF, gained 4.59% after pulling back to its 200-day SMA.  SCO, the leveraged short crude oil ETF, rose 3.77%.  FXP, the leveraged short China 25 ETF was up 3.22% while TWM, the leveraged short Russell 2000 Index ETF lifted 2.92% on very heavy volume.  Please click on the symbols for details.

So much for yesterday’s double-bottom in TLT, the 20+ year Treasury Bond ETF.  It sliced through the recent lows (higher interest rates) and could be setting up a test of the March 8 low.

ITB, the home construction ETF discussed in yesterday’s blog, closed slightly lower today so we purchased additional shares.  Yesterday’s initial purchase was made based on a buy signal issued by the Larry Connors/Cesar Alveraz Multiple Days Down strategy.  Between yesterday’s buy at $25.50 and today’s second buy at $25.31, the average purchase price is now $25.41.  The exit will be when ITB closes above its 5-day SMA.

The VIX – the CBOE Options Volatility Index, a.k.a “Fear Index” – rose to tag its +2 Standard Deviation (SD)  Bollinger Band before reversing but still closed higher on the day.  With most ETF’s and stocks a +2SD touch usually indicates the asset is oversold and a pullback is likely, but we’ve seen that the VIX tends to walk up to its +3SD or +4SD Bollinger Band before the market bottoms.

You can see this on chart below, which can be made full-screen by clicking on it:

In December, February (blue ellipse) and April (yellow ellipse) you can see how the Bands pinched together, followed by the VIX walking up to the +4SD Band before the stock market (SPY) bottomed out.

When I blog about John Bollinger’s techniques it’s usually about his %b indicator, which quantifies a security’s price relative to its upper and lower Bollinger Band.  Today I’d like to discuss the Bollinger Bandwidth, another indicator derived from the Bollinger Bands.  StockCharts.com provides an excellent explanation of what Bollinger Bandwidth is and how it’s interpreted:

“BandWidth measures the percentage difference between the upper band and the lower band. BandWidth decreases as Bollinger Bands narrow and increases as Bollinger Bands widen. Because Bollinger Bands are based on the standard deviation, falling BandWidth reflects decreasing volatility and rising BandWidth reflects increasing volatility.”

Bandwidth is simply the difference between the value of the upper Band and the lower Band, divided by the value of the middle Band.  When the Bandwidth is narrow, volatility tends to be low and the range of an ETF is also narrow.  Since one of the best ways to capture a gain is to buy or short when it breaks out of a narrow range, scanning for a narrow Bandwidth can be an excellent method for finding ETF’s that are getting ready to break out.

But how narrow is narrow?  Put another way, can “narrow” be quantified?  The short is answer is Yes…and No.  What’s narrow to one ETF may be wide to another.  I find the most effective method is to look at a 6 – 9 month chart of an ETF with the Bollinger Bandwidth charted and look for periods of time where the Bands have narrowed.  What you’re looking for is known as “The Squeeze,” which occurs when volatility is very low.

StockCharts.com offers Bollinger Bandwidth as one of its indicators but I like to use High Growth Stock Investor (HGSI) software for that purpose.  While HGSI doesn’t offer a scan for The Squeeze, I like its charting capabilities.  Let’s look for The Squeeze with the VIX in the past few days.  This data in this HGSI chart is through yesterday:

The rectangle highlighted in yellow is The Squeeze.  When the Bandwidth is well below .30, the Bands are squeezed together.  The past few days the Bandwidth has been below 0.20, a very narrow trading range.  When this occurs there tends to be a sharp move in the VIX and the market within a few days as volatility expands, i.e., reverts to its mean. Yesterday’s Bandwidth was 0.1559, the lowest it’s been since mid-December.

If the past repeats itself then the VIX will climb higher and the stock market will trade lower before bottoming.  To profit from this you could look at buying inverse S&P 500 ETF’s like SH or its leveraged cousin SDS.  You could also look at VXX and VXZ, short-term and mid-term futures ETF’s that go up when the VIX rises.

Of course this time it could be different and the VIX went as high today as it’s going to go for the time being.  Will that be the case?  The answer to that question is something we will know, in the fullness of time.

Fortunately, the stock market wasn’t rained out today.  Comments from Federal Reserve officials eased some concerns that the central bank could start reducing its stimulus program, and the Dow Industrials closed up 52 points to close at 15,387.58.  The S&P 500 Index rose .17% and the Nasdaq Composite gained .16%.  Bond yields rose modestly.

ZSL, the leveraged short silver ETF, was up 6.99% after a huge reversal down yesterday.  Similarly, the leveraged short gold ETF GLL rose 3.04%.  Natural gas prices are starting to gain again and BOIL, the leveraged NG ETF, rose 5.01%.  Please click on the symbols for details.

In yesterday’s blog I discussed TLT, the 20+ year Treasury Bond ETF.  It has formed a double bottom pattern, with today’s low and last Wednesday’s low identical at 116.42.  Today was also almost but not quite a bullish engulfing bar, a Japanese candlestick formation that frequently foretells of bottoming action.  You can see it in the chart below, which you can make full-screen by clicking on it:

We’re currently short TLT and while I usually wait for the three moving averages to reverse to the proper upside order before closing the short, this time I think I’ll close it if TLT starts trading back through the 20- and 30-day EMAs.

Homebuilder stocks have been on a tear since October 2011 and today ITB, the home construction ETF, pulled back to just above its 20-day EMA before bouncing.  It also set off a buy signal in the Multiple Days Down strategy.  Described by Larry Connors and Cesar Alvarez in their book “High Probability ETF Trading,” the MDD strategy is simple in concept.  The long entry rules are as follows:

1) The ETF is trading above its 200-day SMA.

2) The ETF closes below its 5-day SMA on the entry day.

3) The ETF must fall at least 4 of the past 5 days.  This means closing prices were lower than the day before for at least 4 out of of the past 5 days.  If this happens you buy the ETF on the close of the fifth day (today).

4) Aggressive version – Buy a second unit (scale-in) if prices close lower than your initial entry anytime you’re in the position.

5) Exit on the close when the ETF closes above its 5-day SMA.

The most recent five days are numbered, with Day 3 being the one day there wasn’t a lower close:

When Connors and Alvarez backtested the MDD strategy against a group of 20 non-levered ETFs from their inception through 12/30/08, the average %P/L was .50%,  there was an average hold time of 3.3 days, and the %Winners was 73.6%.  The aggressive version had an average %P/L of .82% and a %Winners of 80.3%.

Mr. Chris White, developer of the ETF Trading Bandit software which I’ve reviewed in the blog, ran a backtest on the Connors/Alvarez strategies, using the same ETFs and testing the time period from 1/1/09 to 12/31/12. Unlike Connors, Chris tested using an “open-open” methodology that buys and sells on the opening price the day after receiving the signal; Connors used a “close-close” methodology that buys and sells on the close of the day.  Chris’ backtests showed that using the open-open method captures 84% of the gains reported by Connors and Alvarez using the close-close method.

The 2009 – 2012 backtest by Chris on the MDD – Long strategy with the open-open strategy had a %Winners of 64.37% and an average %P/L of .38%.  The average hold time was five days.  Close-close had a %Winners of 72.37% and an average %P/L of .42%.  The aggressive version performed better, with an open-open %Winners of 69.54% and an average %P/L of .50%.  The aggressive close-close version had a %Winners of 79.15% and an average %P/L of .65%.

I ran a backtest on ITB using the aggressive version of the strategy, from its inception date through today.  With 51 trades since the ETF began trading the %Winners was 70.59% (before trading costs).  The average hold time was 4.6 days.  Of course, past performance is no guarantee of future results.

The stock market has to stop going up eventually, right?  You and I both know that but Mr. Market can be irrational longer than we can remain solvent.  Stick with the trend and wait for clear signs the bull has run out of steam before jumping ship.

It would be singing, “I’m tired.”  That’s how the market feels; tired after its record run.  Today’s listless action saw the Dow Industrials pull back 19 points to close at 15,335.28.  The S&P 500 Index was up .01% and the Nasdaq Composite fell .07%.  Both gold and silver made big moves higher.

TAN, the solar ETF, shined brightly as it rose 8.08% on very heavy volume.  GDXJ, the junior gold miners ETF, picked up some lost ground by gaining 7.74%.  It is still well below its major moving averages.  AGQ, the leveraged silver ETF, gained 7.36%, followed by UGL, the leveraged gold ETF up 6.13%.  Please click on the symbols for details.

Back in early April the 20+ year Treasury Bond ETF TLT broke a multi-month long downtrend as rates began to decline and Dave Landry’s Bow-Tie methodology signaled a long entry.  The Bow-Tie is constructed using three moving averages: the 10-day SMA; the 20-day EMA and the 30-day EMA.  The moving averages should converge and spread out again, transitioning from a proper downtrend order (10-SMA < 20-EMA < 30-EMA) to a proper uptrend order (10-SMA > 20-EMA > 30-EMA).  According to Landry, ideally this should happen over a period of three to four days.  The crossover creates the appearance of a bow-tie in the ETF.

Here are the entry rules for a long entry:

1. The moving averages transition from proper downtrend order to proper uptrend order.

2. The ETF must make a lower low and a lower high.

3. Once #2 has happened, go long above the high of #2 until filled.  If the ETF starts trading below its 20- or 30-day EMA before you’re filled, reevaluate the trade and consider standing aside.

On April 8 the moving averages reversed from the proper downside order to the proper upside order.  Here is what the chart looked like a day or two afterwards; you can make it full-screen by clicking on the chart:

The yellow ellipse is the day the moving averages aligned in the proper upside order.  Note how a few days earlier TLT had broken through a descending trendline.  The first day there was a lower high and lower low was April 8, and the high of that day was taken out on April 15.  The trade went long at 122.90

Landry suggests that long trades be held until the ETF starts trading back to or below its 20- or 30-day EMA.  That doesn’t mean you should automatically sell there, although taking partial profits is never a bad idea.  Use other technical indicators to confirm the trend is changing.  If you’re still in the ETF and the moving averages reverse to a proper downtrend order, however, exit the trade.

My personal preference is to hold the trade as long as the moving averages don’t reverse into the proper downtrend order.  It’s okay to continue holding the trade if the 10-day SMA falls below the 20-day EMA, as long as the 10 and/or 20 are still above the 30-day EMA.

Now take a look at the chart as of today:

The grey ellipse is the downside crossover.  The moving averages converged and spread out again, transitioning from a proper uptrend order (10-SMA > 20-EMA > 30-EMA) to a proper downtrend order (10-SMA < 20-EMA < 30-EMA).  Here are the entry rules for a short trade:

1. The moving averages transition from proper uptrend order to proper downtrend order.

2. The ETF must make a higher low and a higher high.

3. Once #2 has happened, go short below the low of #2 until filled.  If the ETF starts trading above its 20- or 30-week EMA before you’re filled, reevaluate the trade and consider standing aside.  The first day there was a higher low and higher high was May 16 and the low was 117.93.  The next day TLT traded lower so the trade closed and went short at 117.90.

Despite the sharp advance in price after the upside crossover, because I wait for the MA’s to reverse rather than sell when the price pulls back to the 20- or 30-day EMA, the trade turned into a loser.  With an entry at 122.90 and an exit at 117.90, the trade lost 4.07% before trading costs.  It’s a shame because TLT traded as high as 124.26 before topping out but hey, losses are part of the game.  The strategy has been short TLT since May 17.

Rather than shorting TLT you can buy TBF, the short 20+ year Treasury Bond ETF.  It goes up  when interest rates rise.  As long as the equities markets hold up then TBF should hold up but a pullback in equities likely will result in TBF following it lower.  Whether or not that happens is something we will know, in the fullness of time.

FAS, the 3x leveraged Financial Bull ETF, jumped 4.65%.  BOIL, the leveraged natural gas ETF, pulled back to its 200-day SMA last week and floated 4.04% higher today.  UWM, the leveraged Russell 2000 Index ETF, gained 2.61%.  Please click on the symbols for details.

DUST, the 3x leveraged gold miners Bear ETF, added another 3.69% and broke through the descending trend line discussed in yesterday’s blog:

Note that the Volume Zone Oscillator still leads the Price Zone Oscillator (38.86 versus 3697), which is bullish.  Breakouts from descending triangles are calculated like with all triangles: Take the distance between the triangle’s high and low points and add it to the breakout price.  The difference is 44.29 (4/17 high and 5/9 low) and adding this to today’s breakout price of 89.50 gives a price objective of 133.79.  There are no guarantees it will reach that, of course, and pullbacks along the way are likely.

YCS, the leveraged short Japanese Yen ETF, gained another .80% and closed at 68.90.  It’s closing in on the target objective of 70.39 discussed in May 9th’s blog.  Volume today was above its 50-day MA of volume.

One of the frustrating aspects of buying when the market is trending strongly higher is: a) finding ETF’s to buy, and b) determining the right time to buy them.  A technique I’ve used for many years is Jeff Cooper’s 1-2-3-4 methodology.  It’s very simple:

1) Identify strongly trending ETF’s.  Cooper looks for stocks or ETF’s with a Relative Strength (RS) ranking of 95 or higher.

2) Wait for the ETF to make a three-day pullback, especially following a short-term high.  This means the ETF makes three consecutive lower lows or a combination of lower lows and inside days.

3) Enter long on Day 4 a tick or two above Day 3′s high.

Use your favorite website or application to find the RS rank of your ETF universe.  I’m a huge fan of High Growth Stock Investor, which I’ve reviewed on the blog.  HGSI let’s me select the ETF/ETN universe with just a click of the mouse and I made a group of those ETF/ETN’s with a RS rank of 95 or higher:

As of yesterday’s close there were 13.  I then looked at the charts and found which ones made three consecutive lower lows or a combination of lower lows and inside days.  The only ETF/ETN that did was XIV, the daily inverse VIX short-term ETN:

The Day 3 high was 23.42 so the buy-stop or buy-limit order is placed on Day 4 (I’ll go out to Day 5) a tick or two above Day 3′s high, say at 23.45 to 23.50.  That was filled yesterday and XIV rose another .60% today as volatility decreased.

It’s important when using the 1-2-3-4 methodology to utilize a  protective sell stop.  Cooper places a good-til-canceled (GTC) order a tick or two below the Day 3 low.  I agree with this but suggest changing that to a trailing stop if your order is filled and the ETF/ETN goes up in price.  For example, since XIV was up today I raised the sell stop to a tick or two below yesterday’s low.  If it closes higher tomorrow I’ll raise the sell stop to a tick or two below today’s low, and so forth.

Buying while the stock market is trending higher is fun, if you know when to get in.  In addition to the 1-2-3-4 methodology you can use Dave Landry’s Trend Knockout and persistent pullback methodologies.  You can read about these by using the search box on the blog.

Well, that’s it for me this week – I’m taking off Wednesday through Friday.  There are some advantages to being retired!  The blog will be back next Monday.

DUST, the 3x leveraged gold miners Bear ETF, rose 7.33%.  TAN, the solar ETF, shined brightly as it gained 3.81% and made a new 12-month closing high.  FXP, the inverse leveraged China 25 ETF, rose 3.63% and XBI, the biotech SPDR, crawled up another 2.27%.  Please click on the symbols for details.

Bond yields have soared the past week and a half as institutional traders feel more comfortable adding risk, reducing their fixed income allocations.  TBF, the short 20+ year Treasury Bond ETF, goes up when yields rise, and it has retraced more than 50% of its decline from the March high to the May low.  You can see this on the chart below; click on it if you’d like to see it full-screen:

Technical analysts consider the prior trend to remain in force until the asset trades back up or down through the 61.8% Fibonacci retracement level.  While the prior trend was for lower yields (lower TBF prices), coming through the 50% level so strongly sure makes it seem like equities are poised to move to the upside again.  How so?

There is typically a strong correlation between the price movements of TBF and SPY, the S&P 500 Index ETF.  A positive correlation indicates that two assets tend to move in the same direction. A negative correlation indicates a strong tendency for two assets to move in opposite directions. A correlation value of near zero indicates there is very little correlation between the two assets.  The highest positive correlation is 1.0 and the lowest negative (inverse) correlation is -1.0.

TBF began trading in 2010 and since then the lowest correlation coefficient between it and SPY on the weekly chart has been zero, last July.  The typical correlation is in the mid-40′s and it’s been as high as  1.0.  This week’s correlation is 0.43:

If you’re not long equities already then pullback days like today are a gift.  Just in case the market pulls a head-fake, though, be prepared to exit.

Although DUST made a huge move higher last month, it has pulled back since then and has formed a descending right triangle:

This pattern is interpreted bearishly and breakdowns are more common than upside breakouts.  Having said that I still expecting DUST to breakout to the upside as gold continues to lose ground.  The Price Zone-Volume Zone Oscillator charts (PZO-VZO), developed by Waleed Khalil, show a bullish divergence between the two oscillators:

Note how VZO (on the right) barely fell below -5 last week while PZO (on the left) went well below -5 over the last three weeks.  Volume is leading price, which is what you expect to find in a bull trend.  Today’s VZO closed at 31.28 and PZO closed at 26.51, a bullish divergence between volume and price.  Trading higher than and closing above the descending resistance line will confirm an upside breakout.

So we have a disconnect between bonds and equities, and technical signs that gold is going to fall further.  Will the action the next few days prove equities right or bonds wrong?  The answer to that question is something we will know, in the fullness of time.

The stock market was in decent shape today although it closed down a bit.  The Dow Industrials slipped 22 points to close at 15,082.62.  The S&P 500 Index dropped .37% and the Nasdaq Composite was down .12%.  Gold gave back yesterday’s gains and then some, and oil prices also closed lower.  Bonds were little changed.

GASL, the 3x leveraged natural gas Bull ETF, rose 3.96% but stopped short of its 50-day SMA.  YCS, the leveraged short Japanese Yen ETF, gained 3.41% as the Yen fell below 100 against the U.S. Dollar for the first time in four years.  Volatility is picking up again and TVIX, the leveraged VIX short-term ETN, rose 3.08%.  Please click on the symbols for details.

At the beginning of the week we picked up shares of XLU, the Utilities sector ETF,, after a buy signal was triggered in the Connors R3 system.  Today XLU closed lower than its initial entry price so a second round of shares was picked up at the close of $39.78.  The average entry price is now $40.05.  The exit will be when the 2-period RSI closes above 70.

The two most common geometric shapes found in technical analysis are rectangles and triangles.  Both are considered continuation patterns, that is, ETF’s tend to break out in the direction of the preceding trend.  By no means are all continuation pattern successful (see Thomas Bulkowski’s book, Encyclopedia of Chart Patterns, for a detailed analysis of the breakeven/failure rate and throwback/pullback rate of each pattern) but overall, there are more winners than losers.

My favorite two patterns are rectangles and symmetrical triangles.  Rectangles have flat tops and bottoms and connecting the highs and lows usually gives you parallel lines.  Symmetrical triangles occur when you have a series of lower highs and higher lows, i.e., converging ascending and descending trendlines.

Let’s take a look at a daily chart of YCS, since it was one of the big movers today.  You can make it full-screen by clicking on the chart:

The symmetrical triangle formed over a period of five weeks after a making a three-year high on April 11.  It pulled back over the next few days and then attempted to rally but made a lower high, followed by another pullback but with a higher low, setting up the symmetrical triangle.  Note the declining volume trend which is very characteristic of the chart pattern.  Today’s breakout came on very heavy volume, more than double its average daily volume.

A target objective is calculated by taking the height of the triangle at its widest point and adding it to or subtracting it from the breakout price.  Today’s breakout was through 64.80, the descending resistance line.  The height of the triangle at its widest point is 66.15 – 60.66, which equals 5.59.  Add this to the breakout price of 64.80 and you arrive at a target price of 70.39.

According to Bulkowski’s research, the symmetrical triangle reaches its objective 66% of the time.  Today’s breakout was a nice start.  A pullback tomorrow morning that doesn’t fall back below the former resistance line could be a good place to buy shares.

I’ll be out tomorrow afternoon so this is the last blog of the week.  Enjoy your weekend.

NUGT, the 3x leveraged gold miners Bull ETF, has been trending lower since September but jumped 16.56% today.  A related ETF, XME (metals and mining), rose 3.06%.  Coming out of nowhere was KOL, the coal ETF, which was up 2.27% and closed above its 20-day EMA for the first time since February.  Crossing the EMA from below to above is generally construed as bullish but KOL has been in a downslide for two years and the 50-day SMA – strong resistance – is just 25 cents away.  Please click on the symbols for details.

After a fast rise in interest rates the past few days, yields may be getting ready to head lower again.  Both IEF, the 7-10 year Treasury ETF, and ILTB, the long-term government bond ETF, have pulled back to and held at an important support point: the 38% Fibonacci retracement level.  The Fibonacci Sequence is a famous mathematical sequence named after Leonardo of Pisa, an Italian mathematician.  Leonardo called himself Fibonacci, which is a derivation from a Latin phrase “filius Bonacci” or “son of Bonacci.”

In the Fibonacci sequence of numbers, each number is the sum of the previous two numbers, starting with 0 and 1. Thus the sequence begins 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610 etc.

The higher up in the sequence, the closer two consecutive “Fibonacci numbers” of the sequence divided by each other will approach what is known as the golden ratio (approximately 1 : 1.618 or 0.618 : 1).  The golden ratio has been used in mathematics, architecture, poetry, music, and art.

Common Fibonacci retracement percentages are 38.2%, 50%, and 61.8%.  In the financial markets, a stock/ETF/future that rises in price, followed by a price decline that only retraces 38.2% of the decline but no further, is common.  A retracement of this magnitude is considered bullish and both IEF and ILTB go up when interest rates drop.

A retracement of 50% is also common, and is still not considered a trend reversal.  It isn’t until the ETF retraces 61.8% of its decline that the odds shift in favor of a trend reversal, i.e., there is a good likelihood the advance is over.  The principle works the same way for ETFs that have completed a sustained price drop and are now rising.

An ETF that retraces 38.2% and holds is considered a likely candidate to see the prior trend continue its course.  Please review the two charts below, which you can make full-screen by clicking on them:

While IEF touched the 38.2% level and promptly reversed course, ILTB traded lower and today closed slightly below this level.  Now take a look at where the Relative Strength Indicator (RSI) made its recent lows.  First IEF and then ILTB:

In both ETF’s the RSI bottomed out around 44 – 45 and then turned higher.  Research by Andrew Cardwell and Connie Brown shows that securities trending higher typically have Relative Strength Indexes that don’t fall much below the low to mid 40′s.  The traditional oversold value for the RSI is 30 and lower.

If the stock market pulls back even just 2% – 4%, bond yields are likely to drop as money shifts from equities into fixed income investments.  Going long either IEF or ILTB could give you an opportunity to make some money during a pullback and/or hedge part of your portfolio.