The bond market took a breather Thursday as equity investors began to shrug off China concerns and strong U.S. retail sales showed a September Fed rate hike could still be on the table. And according to one trader, bonds will continue to selloff in the near term.
"Bonds have made a pretty substantial move higher in this recent pocket of volatility in the stock market," Todd Gordon said Thursday on CNBC's "Trading Nation." The , the ETF that tracks longer-dated bond yields, is up nearly 8 percent from its low on June 26, while the S&P 500 is down less than 1 percent in the same period. "I think the stock market is beginning to stabilize and that's going to set the bond market up for a little bit of a retracement." Bond prices and rates move inversely.
And looking at a chart of the TLT, Gordon noted that prior support has become a key resistance level around $125. "Up against that resistance level there's also a candle reversal pattern and that, to me, confirms the TLT could begin to change course," said the founder of TradingAnalysis.com.
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"The other indicator that I'm watching to let me know a pullback is upon us is the relative strength index," said Gordon. Technicians often look at the relative strength index to detect where a stock, or in this case ETF, is heading based on recent trading. "We have a pattern of three lower lows in the relative strength index as prices made three higher highs," he said. "That tells me there is a momentum divergence."
Gordon believes the TLT could drop as much as 5 percent in the near term. It was around $123 in late trading Thursday.
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