Add TLT Puts

No Demand for the 20-Year

By Bryan Bottarelli
Tuesday, June 30, 2009 10:35 AM EDT
Tue, 30 Jun 2009 14:35:00 GMT

PLAY: Buy the TLT August 95 Puts (ILT TQ) at or under $3.60, good for the day. Place a protective stop limit at $2.10 and a pre-determined sniper sell at $5.50.

Dear Bottarelli Research Member,

Good morning. As we begin the final trading day of Q2, we saw a slight opening session gain turn into a slight mid-morning loss. Leading into a 3-day holiday weekend, I would expect most floor traders to finalize their positions today or tomorrow, and then start the weekend early. As part of this finalization process, I can’t imagine that anyone would enter into a long position over an extended weekend. Therefore, we could very well see some profit-taking starting today or tomorrow. So, let’s continue holding our SDS August 57 Calls (SDS HE). On a weekly basis, the SPX is bumping its head on the 50-day moving average, which appears to be a strong resistance level. To my eye, this clearly signals coming weakness.

SPX

At the same time, I’m also seeing a well-defined resistance level that’s now been established on the iShares Barclays 20+ Year Treasury Bond (TLT – NYSE). In recent Treasury auctions, the shorter-term notes have been selling well. In fact, the Fed has said that they’ll buy 7 — 17 year notes. But if that’s the case, where does that leave the 20- and 30-year notes? I’ll tell you: It leaves them unwanted from both foreign and domestic buyers alike. As a result, I think the TLT is now due for a sizable pullback. In the past, we’ve played this move using the Ultra Short 20+ Year Treasury Pro Shares (TBT – NYSE). But for today, I’d like to play the pure 20 Year Treasury by adding puts on the TLT.

TLT

PLAY: Buy the TLT August 95 Puts (ILT TQ) at or under $3.60, good for the day. Place a protective stop limit at $2.10 and a pre-determined sniper sell at $5.50.

NOTE: Typically, a market sell-off will spark safe-haven buying in Treasuries. But recently, this correlation has been reversed, and the markets and Treasuries have moved up in tandem. In many respects, that’s why I’ve been skeptical about this latest upside move in both the major market averages and Treasuries. If they’re both rallying on false pretenses, then I feel they’ll both fall together as well (especially when the TLT chart is offering such a bearish signal). Let’s take advantage of this situation by adding TLT puts going into August.

And as always…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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