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The TLT ETF Hit Stocks - Here’s Why It Did and How to Trade Bonds

The fall in bonds triggered a mild selloff in stocks on Tuesday. How does the TLT impact the S&P 500 and how can we trade bonds from here?

Everything was going pretty good for the stock market on Tuesday until the afternoon.

The S&P 500 had notched another all-time high as the markets remained firmly in a melt-up going into the earnings season.

Further, the index continued to push toward 4,400 on Wednesday as it hit another new high but then backed off that level once more.

Bulls can’t blame bonds for Wednesday’s price action, but they can for Tuesday’s dip.

As bond prices go down, yields go up. While we’re not dealing with a 1.0 correlation between stocks and bonds, a midday rip in yields will get investors’ attention.

In that sense, the iShares 20 Plus Year Treasury Bond ETF  (TLT) - Get Report is worth paying attention to.

It’s obviously not the only driving factor for the stock market but it’s one that can have an impact.

Trading the TLT ETF

Daily chart of the TLT ETF

Daily chart of the TLT ETF

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The TLT is rebounding on Wednesday, helping to give some relief to the equity markets. The question now is whether it can continue to push higher or will yields begin to climb as the TLT sinks?

Again, it’s not the only thing that impacts stocks. But with equities at or near all-time highs, rapid gyrations in yields can create knee-jerk reactions to the downside.

In February, the TLT plunged out of its channel before recapturing it last month. It rallied all the way up to channel resistance before being rejected. On the dip, the 21-day moving average held as support, as did uptrend support.

In July, it was able to break out of the current downward channel, rallying up to the 200-day moving average.

After gapping down from $148.17, the TLT ETF is trying to find its footing and it looks like we’ll get an inside day on Wednesday. Traders may very well use Wednesday’s range as a way to trade this name.

A move above Wednesday’s high gives them an “inside-and-up” day, and puts the gap-fill level at $148.17 and the 200-day moving average back in play. Above last week’s high and the 50-week moving average is in play, followed by a potential rally up to the 50% retracement.

While some will point out the potential “flight to safety trade" in this scenario, others will cheer the dip in yields.

If we get a move below Wednesday’s low — an “inside-and-down” day — we could see a test of the 21-day moving average, uptrend support and the topside of prior channel resistance.

Unless it breaks, that seems like a reasonable dip-buying opportunity.