Trading Nation

Charts are pointing to a relief rally for bonds, says trader

Trader sees a rally ahead for bonds

The bond market is about to breathe a sigh of relief, founder Todd Gordon told CNBC's "Trading Nation" on Thursday.

Looking at a chart of the ETF that tracks longer-term Treasurys, Gordon said the bond market is oversold as yields remain overbought. He expects a relief rally around the corner. Here's why:

• Gordon observes that the 20+ Year Treasury ETF (TLT) has just completed the fifth wave of the Elliott wave theory, which according to him usually indicates that the trend momentum is about to decrease.

• Given TLT was generally in a downtrend, Gordon says that this rate of change in momentum means that the "interest to sell is decreasing" for TLT, and TLT is about to head higher.

• Gordon also mentions that the move against the trend typically mirrors the level of the fourth wave, in this case $122 on TLT.

• This $122 level on TLT, according to Gordon, is also confirmed by small Elliott waves that are found within each wave, and even those indicate that TLT is heading to $122.

• As a result, Gordon wants to buy the June monthly 118-strike call and sell the June monthly 122-strike call for a total of 90 cents, or $90 per options spread.

• If TLT closes above $122 on June 15 expiration, Gordon could make $314 on the trade. If TLT closes below $118 on June 15 expiration, however, Gordon would lose the $90 he paid for the trade.

The trade: Gordon is suggesting buying the June monthly 118/122 call spread for 90 cents, or $90 per options spread.

Bottom line: Gordon believes that bond prices will rise, and TLT will return to $122.


Correction: This story was revised because Gordon said he meant to say in the video that he wants to buy the June monthly 118-strike call and sell the June monthly 122-strike call, not the strike puts.