What a difference two weeks makes.

Two weeks ago, the high-yield bond market was falling hard. The iShares iBoxx High Yield Corporate Bond Fund (HYG) had broken support on its daily chart. The weekly chart was rolling over.

I argued that if the junk bond market decline continued, then it was only a matter of time before the stock market turned lower as well.

Fortunately – for the stock market bulls, anyway – buyers jumped into the high-yield market at just the right time. High-yield bonds have rallied hard for the past couple of weeks. The iShares iBoxx High Yield Corporate Bond ETF (HYG) is back near its high of the year, which supports the new highs in the stock market. All is right with the world again.

EXCEPT… the technical condition still looks dangerous to me.

Look at this daily chart of HYG…

Two weeks ago, HYG was oversold. It was quite extended below both its 50-day moving average (the blue line) and it 9-day exponential moving average (the red line).

The rally since then has been quite strong. But all HYG has really done is come back up to test the 50-day MA as resistance.

This pattern is still bearish. HYG is below its 50-day MA. And the 9-day EMA is below the 50-day MA.

In order to turn the pattern to bullish, HYG and its 9-day EMA both need to cross above the 50-day MA. Until that happens, traders should stay on guard for another move lower in the junk bond market – especially since the weekly chart looks like this…

On the weekly chart, HYG has broken down from a bearish rising wedge pattern. There was significant negative divergence on key momentum indicators like the MACD and RSI.

At the very least, this breakdown should lead HYG to test its 50-week moving average near $86 over time.

And that sort of decline in junk bond prices is likely to induce some selling pressure in the broad stock market.

Best regards and good trading,

Jeff Clark

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