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There's a 'warning sign' brewing for the bond market, technical analyst says

Annie Pei

The bond rally may finally be coming to an end, according to TradingAnalysis.com founder Todd Gordon, who says the run has become long in the tooth.

The TLT (TLT), the ETF that tracks long-term bonds, has climbed almost 2 percent in the past month, but Gordon warned that bond bulls beware, as he has a chart that shows weakness ahead.

The DBC ETF (NYSE Arca: DBC), which tracks the movements of 14 commodities, normally has an inverse relationship with the TLT. But with the rally in TLT, the relationship seems to have stalled as of late, which concerns Gordon.

"TLT is sort of consolidating, not confirming that rally up in commodities," explained Gordon Monday on CNBC's "Trading Nation." "So this might be a warning sign that bonds could have another leg down."

To play the consolidation he sees in TLT, Gordon wants to sell the September monthly 125-strike call while buying the September monthly 128-strike call for a credit of $1.00, or $100 per options contract expiring Sept. 15.

Based on Gordon's levels, he would make a maximum profit of $100 if TLT closes below $125 on Sept. 15 expiration, the credit he made putting on the trade. But if TLT were to close above $128 on expiration, Gordon could lose $200.

While the risk-reward ratio is skewed, Gordon emphasizes that given his levels, the probability of his trade working out is quite high since TLT is already at $125 as of Monday.

"What we give up in reward-to-risk ratio we pick up in probability of success," he said. "By selling options above us, we have a profit margin from $125 all the way to $126."

Overall, TLT is up 5 percent year to date.



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