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How to Trade the Spike in Interest Rates

By Jeff Clark
Tuesday, March 20, 2012

Interest rates are spiking higher.
While most of Wall Street is sidetracked watching the meteoric rise in Apple shares, there's an even bigger move happening in the long-term interest rate market. Look at this chart of the 30-year Treasury bond yield...
30-Year Treasury Bond Chart
The chart broke out of an ascending-triangle pattern (the blue lines) late last week, and interest rates rallied from 3.2% to almost 3.5% in just three days. That's a gain of nearly 10% – or almost twice what Apple shares have done over the same time frame. And there's more to come...
Yesterday, interest rates ran up to resistance at 3.5%. That's last October's high, and it's a natural spot for the up-move to take a break. Rates could chop back and forth here for a while... or they could come all the way back down to retest the previous resistance line on the chart at 3.2% and still maintain the bullish pattern.
Fixed-income investors should consider using a move back down to 3.2% as a chance to move out of long-term bonds. Traders could use a move back down as an opportunity to go short the Treasury bond market by either buying puts on TLT – the long-term Treasury Bond ETF – or shorting TLT shares themselves.
With interest rates breaking out of the ascending-triangle pattern, the chart projects a move up to about 3.8%. But if rates really get cooking, we could see the 30-year yield rise back up to where it was last July – at about 4.3%.
Here's how that sort of a move would affect shares of TLT...
20-Year Treasury Bonds (TLT) Chart
This is basically the flip-side of the 30-year yield chart. Since bonds and interest rates move opposite each other, a breakout on the interest rate chart shows up as a breakdown on the bond price chart.
TLT broke down from a descending-triangle pattern (the blue lines) and is now resting on the support of its October low at $110. If interest rates spike up to 3.8%, the pattern projects a move down to $102 for TLT. If rates run up to 4.2%, we could see TLT trade all the way down to $95. So there's plenty more room on the downside.
Keep in mind... TLT could bounce in the short term and retest its former support near $115 per share. If that happens, it would set up an ideal case for a short sale.
Best regards and good trading,
Jeff Clark

Further Reading:

Yesterday, Larsen Kusick told readers about the perfect sector to put your money to use right now. "Despite a 17% rally this year... and despite growing optimism... this sector is still cheap," he writes. "And there's room for it to push higher, even if the rest of the market goes sideways for a few months." Read more here: You Won't Believe What Sector is Still Cheap.
For more tips on simple but powerful ways to make low-risk profits in the market, check out a recent interview with master trader Dr. David Eifrig. Doc's trading strategy is "one of the few legitimate 'free money opportunities' in the investment markets today."

In The Daily Crux
Market Notes
Apple will start paying a 1.8% dividend yield this summer.
European stocks are in recovery mode... German (EWG), British (EWU), and Swiss (EWL) funds are at six-month highs.
Last year's losers are becoming this year's winners... Bank of America, Sears, Netflix, and Illumina are up 50%-plus in 2012.
"Backdoor to Asia" play Las Vegas Sands breaks out to a fresh three-year high.
Market Watch
Symbol Price
S&P 500 1409.75 +0.4% +10.2%
Oil (USO) 41.29 +0.6% +0.8%
Gold (GLD) 161.59 +0.2% +16.8%
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Volatility (^VIX) 15.04 +4.2% -38.5%
Gold Stocks (^HUI) 473.76 -0.6% -11.7%
10-Year Yield 2.38 +3.5% -27.4%

World ETFs
Symbol Price
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S. Africa (EZA) 69.55 +0.0% +9.6%
Singapore (EWS) 12.84 -0.5% +5.4%
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Israel (ISL) 13.39 -0.3% -13.1%
India (IFN) 22.49 -1.9% -22.3%
Russia (TRF) 17.21 +0.2% -28.0%

Sector ETFs
Symbol Price
Retail (PMR) 25.68 +0.6% +33.7%
Big Tech (QQQQ) 66.99 +0.7% +24.2%
Consumer Svcs (IYC) 80.44 +0.4% +19.2%
Health Care (IYH) 76.96 +0.1% +16.7%
Utilities (XLU) 34.54 -0.7% +15.4%
Big Pharma (PPH) 73.61 +0.6% +14.1%
Real Estate (IYR) 62.57 +0.6% +11.6%
Biotech (PBE) 22.69 +1.3% +10.4%
Industrials (IYJ) 72.48 +0.2% +8.2%
Transportation (IYT) 95.72 +0.2% +6.1%
Software (PSJ) 26.95 +0.4% +5.5%
Defense (PPA) 20.23 +0.2% +4.7%
Media (PBS) 15.09 +0.9% +4.5%
Construction (PKB) 14.26 +0.1% +4.1%
Financials (IYF) 58.80 +0.7% +2.4%
Insurance (PIC) 16.41 +0.0% +2.4%
Telecom (IYZ) 22.76 +0.5% +2.2%
Water (PHO) 19.07 +0.0% -0.3%
Semis (PSI) 16.04 +0.9% -1.5%
Internet (HHH) 70.21 +0.1% -3.8%
Basic Mat (IYM) 71.69 +0.4% -5.3%
Oil Service (OIH) 121.00 +2.4% -11.4%
Nanotech (PXN) 6.72 -0.2% -28.5%
Alt. Energy (PBW) 5.81 -0.2% -41.1%

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