Bonds have been one of the most reliable—and confounding—trades of the year, with the yield on the 10-year falling from 2.20 percent to below 1.90 percent in 2015. And based on one trader's chart work, the move, combined with seasonal trends in the market, could set the stage for a "vicious" rally.
Todd Gordon, founder of TradingAnalysis.com, said the volatility that typically surrounds earnings could have some investors running for the safety of Treasurys and force a breakout in bond prices. (Bond yields move inversely to prices.) To profit from the potential move, Gordon looked to the TLT, the ETF that tracks U.S. Treasury yields, as a way to seek profits.
"To set up the trade you'll notice a pretty significant decline here [in the TLT] from the February high," said Gordon on Wednesday's "Trading Nation." The TLT has fallen 6 percent from its all-time high of $138.50 set on Jan. 30. "Then we saw a bounce in late February and another decline in March."
But according to Gordon, the TLT is still quite strong technically. "The TLT has risen back above its key 50-day moving average and it looks to be using it as support at $129," he said. "We now are experiencing a period of consolidation, and seeing a series of lower highs and higher lows."
That so-called consolidation pattern, said Gordon, will eventually be the catalyst that could drive bonds higher. "The result of consolidation tends to be a breakout, which resolves itself in the direction of the pattern," he added.
"If this particular pattern were to come to fruition, we wouldn't break below the support level of $129," said Gordon. "And as far as the upside, we should meet the prior trend wave in terms of distance." Gordon noted that the prior uptrend was a $10 range, and in order to come up with a measured target, he simply tacked that amount onto the current price. "We expect to see another $10 move to the higher, which brings us up to approximately $142."
Curiously enough, the move higher in Treasurys has come amid the backdrop of rising stock prices. Early earnings results from the have generally been better than expected, and investors have responded by buying stocks. Still, Treasurys, typically a safe haven in volatile times, have remained stubbornly high. And according to Gordon, if earnings begin to falter, investor may bid up bonds even further—creating a bit of a win-win scenario in Gordon's view
"The TLT is a nice way to trade a potentially volatile earnings season," said Gordon.
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