We've enjoyed years of historically low interest rates. Investors are begrudgingly coming to terms with the realization that the trend is turning. While stocks haven't offered much profit potential, a play on interest rates with TBT stock offered multiple swing trading opportunities.
The Inverse Relationship Of Bonds And Interest Rates
Exchange traded funds (ETFs) offer many ways to trade bonds. The iShares 20-year Treasury ETF is just one example. But remember, there is an inverse relationship between the price of bonds and the yields they offer. The more buying in bonds, the less yield they need to offer. The more selling in bonds, the more yield they need to offer to entice buyers back.
So how do you profit from rising interest rates? You can short the bonds or go with an ETF that does it for you. That's why we chose the ProShares Ultrashort 20+ Treasury ETF. It's a 2x inverse of the long-term treasuries, which puts you in the same direction as interest rates.
Sure, it's easy enough to surmise that the Fed cutting back on its asset purchasing will take away a lot of demand in bonds. Hence a higher yield. But here's how we handled the technical action on TBT stock for swing trading.
Swing Trading Example: TBT Stock
TBT stock formed a yearlong cup with handle. We added it to SwingTrader as it broke above the downtrend in its handle (1). While the long-term prospects for rising interest rates are good, we stick to a shorter time frame for swing trading. That means taking profits into strength and not wearing out our welcome.
For TBT stock, we took our first third the day after our entry with 4% profit (2). Another third came off two days later with a 7% gain from our entry (3). As interest rates soared, so did our TBT position and its relative strength line.
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We used its rising 5-day line as a guide for holding. When TBT stock broke below it, we exited (4). But we kept it on our radar in case it provided another opportunity.
We didn't enter again on the pullback over the next four days because the modest decline did not even touch its 21-day line. But that did mean we were on the sidelines as it made another strong move without us (5).
Another Profitable Trade As Interest Rates Rise
TBT stock nearly came down to our exit over the next few weeks and this time it did pull back below its 21-day moving average. As it broke its downtrend, we prepared for another move and added it to SwingTrader again (6).
We took a third off again when we hit 4% profit (7), though it took a little longer this time. When interest rates shot up a few days later (8), we took another third off with more than an 11% gain from our entry. A concern at this point was how extended TBT was from its moving average lines. It seemed unsustainable.
While it did push a little higher a few days later, TBT stock quickly reversed (9). That was right on the heels of a 75 basis point Fed hike. We didn't wait long to exit the remaining position while we still had a 10% gain from our entry. The subsequent drop ended up being a big outside day that engulfed the prior three days of price action.
This week the pullback continued in earnest but stopped just above its 50-day moving average line (10). That means another opportunity to profit may be around the corner.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on Twitter at @IBD_JNielsen.
