Top trader: A trade with 10 times more upside than downside today

From Jeff Clark, Editor, Stansberry Research Pro Trader:

Widows and orphans have had a tough few months.

Long-term U.S. Treasury bonds – often cited as the safest investment on the planet and suitable for the most cautious investors – lost more than seven years’ worth of income in just the past four months.

Lending money to the U.S. government for 30 years in exchange for a 2% yield turned out not to be such a good idea. Yields are now 50% higher than they were back in July. And these Treasury bonds, or “T-bonds,” have collapsed in price.

But that has given us a fantastic risk/reward setup today…

Let’s start by looking at this chart of the iShares 20+ Year Treasury Bond Fund (TLT)

TLT peaked at more than $143 per share back in July. It’s now trading around $121 per share. That’s a loss of more than 15% – enough to wipe out about seven years’ worth of interest payments – in four months.

This decline surprised a lot of investors… but it shouldn’t have. They received several warning signs.

For example, in early July, we pointed out the dangerous rising-wedge pattern that was forming on the chart. Then, after TLT broke down in September and rallied all the way back up to its 50-day moving average (DMA), we recommended selling TLT short to profit on a stronger downside move.

That was a terrific low-risk/high-reward trade. And it paid off well.

Now, though, the move is overdone. TLT is ready to bounce. The best risk/reward trade setup this week is in buying Treasury bonds.

Let me explain…

TLT closed Friday at $120.85 per share. That’s right on its long-term support line… going all the way back to last October. This is a logical spot at which to expect a bounce.

Also, look at how far TLT is trading below its 50-DMA. It rarely strays more than 3% above or below the line before reversing back to retest it. As of Friday’s close, TLT was trading at more than 8% below its 50-DMA.

I can’t ever recall seeing that large of a gap.

The proverbial rubber band is stretched to the limit. TLT is poised for a snap-back rally.

Aggressive traders can buy TLT right here near $121 per share. If shares keep moving lower and break the support line on the chart, we can stop out of the trade at about $120 and take a small loss of $1 per share.

On the other hand, if support holds and TLT reverses higher, the upside target is the 50-DMA at more than $131 per share.

So by buying TLT at $121 per share and using the recommended stop loss, you’ll have $1 worth of risk versus $10 of potential reward. That’s an excellent trade setup – even for widows and orphans.

Best regards and good trading,

Jeff Clark

× Subscribe to Crux
Want more posts like these?
Comments
Like us on Facebook?
Crux Contributors