How to Trade Bonds Now, When Yields Are Rising -- Must-See Charts

NEW YORK (TheStreet) -- U.S. Treasury yields are on the rise, with the yield on the 30-year bond rising above its 200-week simple moving average. Investors who want to trade bonds like they were stocks should use the 20+ Year Treasury Bond ETF (TLT), which represents a basket of Treasuries with maturities of 20 years to 30 years.

The basic concept to remember is that when bond yields rise, the prices of bonds -- and thus this of exchange-traded fund -- will decline. Here are daily and weekly charts for the U.S. 30-year bond yield and for the bond ETF which clearly illustrate that you can trade bonds just like a stock.

Here's the daily chart for the 30-year bond yield.


Courtesy of MetaStock Xenith

This is a daily chart for the yield on the U.S. Treasury 30-year bond yield for the last 12 months. This yield set an all-time intraday low of 2.221% on Jan. 30, then began an uptrend through the low of 2.445% on April 6. The upside trend line began from a high of 2.870% on March 6 through the high of 3.128% on May 12. Technicians call the price action between these nearly parallel trends as a trading channel.

Within the channel are the 50-day and 200-day simple moving averages of 2.953% and 2.834%, respectively. This golden cross for yields is a negative for bond prices because as yields rise, the price of the bond declines. Note that Friday's high yield of 3.256% is approaching the upper trend of the channel at 3.307% on Monday.

Here's the weekly chart for the 30-year bond yield.


Courtesy of MetaStock Xenith

This is a weekly chart for the yield of the U.S. Treasury 30-year bond going back to the end of 2007. Note how the 200-week simple moving average -- now at 3.154% -- has been the longer-term reversion to the mean for the last 7.5 years. The 30-year yield ended last week above the 200-week average. Observe the long-term down trend for the 30-year yield that connects the high of 4.791% set during the week of Feb. 11, 2011 and through the lower high of 4.001% set during the week of Jan. 3, 2014. This tend comes into play around 3.5% in mid-October.

Note that the momentum reading of 81.15 is above the overbought threshold of 80.00, which suggests that the rise in yields may be overdone. The key level on technical charts to hold this week is a yield of 3.275%.

Here's the daily chart for the bond ETF.


Courtesy of MetaStock Xenith

The bond ETF is down 8.5% year to date, and traded to a new 2015 low of $114.88 on Friday. With yields under a golden cross, the price of the bond ETF is under a death cross with the 50-day simple moving average of $121.19 below the 200-day simple moving average of $124.10.

Investors can buy and sell this ETF by looking at the trends on the bond yield. Buy when the yield rises to the higher yield uptrend line and book profits when the yield declines to the lower yield uptrend line.

Here's the weekly chart for the bond ETF.


Courtesy of MetaStock Xenith

Like the weekly chart for the bond yield, this chart tracks the price of the bond ETF going back to the end of 2007. Note how the 200-week simple moving average now at $117.20 has been the longer-term reversion to the mean for the last 7.5 years. The bond ETF ended last week below the 200-week. Observe the long-term uptrend for the bond EFT that connects the low of $88.14 set during the week of Feb. 11, 2011 and through the higher low of $101.17 set during the week of Jan. 3, 2014. This tend comes into play around $109.08 in mid-October.

Note that the momentum reading of 16.30 is below the oversold threshold of 20.00, which suggests that the decline in the price of the bond ETF may be overdone. The key level on technical charts to hold on Monday and Tuesday is $114.44, and a lower key level of $112.02 expires at the end of the week on Thursday.

Investors not familiar with technical analysis should begin with the notion that a price chart for a stock shows a road map of past price performance, which provides guidance for predicting future share price direction.

Here's how to read a daily chart. There are two moving averages to follow; the 50-day simple moving average is in blue while the 200-day simple moving average is in green.

Here's how to read a weekly chart. This chart shows weekly price bars going back to the beginning of 2007 and thus includes the Crash of 2008, then the current bull market for stocks that began in March 2009. The red line tracks the ups and downs of the key weekly moving average. The green line is the 200-week simple moving average. The red line that oscillates along the bottom of the chart is the momentum reading on a scale of 00.00 to 100.00. A reading below 20.00 is oversold and a reading above 80.00 is overbought.

A technically positive weekly chart occurs when a stock ends a week above its key weekly moving average with the momentum reading rising above 20.00.

A technically negative weekly chart occurs when a stock ends a week below its key weekly moving average with the momentum reading declining below 80.00.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the investments mentioned.

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