Bet on a bond bounce, says top technician

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Chartmaster sees a bond yield breakdown ahead of big Fed decision

It's Fed week once again, and the bond market is anxiously anticipating the central bank's decision on whether or not to cut interest rates.

The Federal Reserve's European counterpart made the decision to cut rates and kick off a major bond-buying program last week to stave off a recession, and now all eyes are on how the U.S. will respond to lingering fears of a global slowdown.

For their part, U.S. bond yields surged last week, with the 10-year note yield kicking off the week at 1.5% and finishing up Friday above 1.9% at its highest level since July, but Carter Worth, head of technical analysis at Cornerstone Macro, said that might be as good as it gets for yields – at least for a while.

"One thing we know is that there is a fairly well-defined level where there was equilibrium, from which, of course, rates collapsed and we hit 1.45%," Worth said Friday on "Options Action."

Worth noted we've seen a ricochet back to the low end of that range of equilibrium, but yields have a long way to go before they break the downtrend that has been in place since October. Rather than the end of the decline in yields, Worth thinks there is even more pain on the horizon.

"There are countertrend moves – we know this – and after countertrend moves, you get a resumption of weakness. My thinking here is that this is basically at a point where this is likely to abate," said Worth.

So, if Treasury yields are about to fall, that should mean that bond prices are about to rise. Similarly to the downtrend in place for yields that has yet to be broken, the 20+ Year Treasury Bond ETF (TLT) – despite selling off last week – is still above the uptrend that has been in place for most of the past year.

As Worth pointed out, each time the TLT has come close to that trend line, it has bounced off of it to the upside, and he's wagering on it happening again.

"The betting is that TLT is going to be good for a bounce. So, I don't see rates going more than about 1.95%, we're close enough at this point. I think one wants to start rebuying TLT," Worth said.

The TLT was up 1% in Monday's session.

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