When the Fed pivoted its stance on interest rates last November, the iShares 20 Plus Year Treasury Bond ETF (TLT) enjoyed a massive boost.

When the market expects rates to fall, the value of existing bonds increases (and vice versa).

That’s because investors will receive a higher yield from older bonds than new bonds issued with a lower yield.

That’s what happened here.

But that strong rally put TLT in overbought territory. And it retraced quickly.

So we watched it closely in anticipation of a bounce.

By capturing that move, we generated a 47.5% gain in just 13 days for members of my options advisory, The Opportunistic Trader.

So let’s check that trade out now…

A Subtle Setup

In the chart of TLT below, you can see the diverging pattern between the Relative Strength Index (RSI) and the TLT stock price through October (orange lines).

Growing buying momentum halted TLT’s fall.

Then TLT rallied as the RSI ramped up through resistance (green line) and into the upper half of its range:

iShares 20 Plus Year Treasury Bond ETF (TLT)


Source: e-Signal

Yet the RSI eventually reached overbought territory (upper grey dashed line). That put TLT’s rally under increasing pressure.

As you can see, the RSI bounced along the overbought line (red circle). It made a couple of lower highs before falling back towards support.

This steady decline in the RSI pulled TLT down rapidly.

Yet TLT’s sharp pullback also hinted that there could be a trade for us.

And we saw a subtle change of momentum setting up a potential reversal.

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So on January 18, we entered a long position by buying a call option on TLT.

As you can see, TLT didn’t bounce straight away. Instead, it gradually built short-term support as the RSI flattened out.

Then the RSI burst back through resistance and into its upper band. That enabled TLT to rally.

Take another look:

iShares 20 Plus Year Treasury Bond ETF (TLT)


Source: e-Signal

With our position in good profit, we closed out our trade by selling our call option on January 31 for a very tidy 47.5% gain.

To be clear, we generated this return by using options. Had we just bought the shares instead, our profit would have been less.

Yet as this trade shows, even a subtle change in momentum can hand a nimble trader outsized profits.


Larry Benedict
Editor, Trading With Larry Benedict


Did you take part in this trade? Let me know your experience at [email protected]