(TLT) – Rates in Focus – August 16, 2021

Bullish – TLT – $148.55

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Market Outlook:

Equities ended last week on a positive note with SPY and QQQ gaining 0.18% and 0.35% on Friday respectively. We are seeing relatively healthy sector rotation as broadening leadership has allowed the S&P 500 Index to outperform the technology-heavy Nasdaq-100 Index which has remained rangebound in recent weeks but has found a strong area of support at $365. Last week saw a sharp increase in momentum for Financials with XLF breaking above the $38.50 resistance level and retesting it on Friday. The RSP equal-weighted index also continued higher after breaking above the $153 resistance level which indicates a healthy market rally. Some key events to keep an eye on this week are US retail sales numbers, retail earnings announcements as well as Fed minutes which may give some clues as to when a scaling back of monetary policy can be expected.

TLT Bullish Trade Idea:
Our bullish trade is the 20+ Year Treasury Bond ETF (TLT). After rallying from May, TLT pulled back since July and temporarily dipped below the 100 D MA where it found support and bounced higher with strong momentum, gaining 1.58% on Friday. This provides a good risk/reward trade for a credit spread to take advantage of a moderately bullish/neutral outlook for TLT. 

As this is a credit spread, look to take profits at 50% gain and place the cut losses at 100%:

Take Profit – $0.95 Debit

Stop Loss – $3.80 Debit

Look to close the trade at 21 days to expiration if neither the take profit or stop loss level has been reached. View TLT Trade

Sector Outlook

The Relative Rotation Graph (RRG) for sector rotation indicates that there is healthy sector rotation and broad leadership with 5 sectors in the Improving and Leading categories and 6 sectors in the Lagging and Weakening categories.

Leading (positive relative trend and positive relative momentum): Financials and Materials are the new entrants to this category with both experiencing an improvement in relative strength. However, the weaker momentum displayed by Materials is concerning, and may see XLB cross over to the Weakening category should this continue. 

Weakening (positive relative strength and negative relative momentum): Healthcare is the only sector in this category after rotating out of the Leading category last week. XLV remains in a bullish trend and will likely rotate back into the Improving or Leading categories should it find support and commence a rally with strong momentum.

Lagging (negative relative trend and negative relative momentum): 5 sectors have moved into the Lagging category this week with Real Estate, Technology, and Discretionary experiencing slower momentum and relative strength. Look for an uptick in momentum for Staples, Communications and Discretionary this week as a move back into the Improving category is likely.

Improving (negative relative trend and positive relative momentum): 2 sectors are currently in the improving category – Energy and Industrials. However, Energy continues to show weakening momentum while Industrials is showing growing momentum and relative strength which should see it rotate back into the Leading category. 

XLB

Materials were highlighted last week after breaking above the $83 resistance level and retesting it. The past 5 days saw a continuation of the rally with XLB looking likely to reach $88 once again.

XLU

XLU is in the leading category and despite showing signs of weakening momentum, Utilities continue their grind higher to reach pre-pandemic levels at $70. Look for retests of the previous resistance level at $68 for good risk/reward long opportunities. 

Market Observations

  • MCD – Recently broke above the $238 resistance level and has since pulled back. Price is showing signs of reversing and rallied with strong momentum on Friday. Look for rally back to $245. 
  • SBUX – Price has pulled back significantly in recent days to retest its ascending trendline where SBUX is showing signs of a bullish reversal. Outlook remains bullish and price is at an area for a good risk/reward bullish opportunity.  
  • GILD – Despite choppy price action, GILD has broken above the $70 resistance level which indicates a further rally is on the cards. Next resistance at $77. 
Tony Zhang