Monthly Archives: May 2019

Prepare For The Bond Implosion Now With This ETF

Bond yields continue to reflect a risk-off environment. It has been that way for a long time but when that docile dynamic starts to reverse, it could accelerate quickly. Traders should be prepared to profit from the machinations of the “bond vigilantes,” and higher yields.

Jeffrey Gundlach, of DoubleLine Capital has been warning about corporate debt in particular for years. The “bond king” calls it an ÔÇťocean of debt,” that will create a problem for the stock market.

It is impossible to say when the reversal will come and the degree of havoc that will be wrought, but traders should be prepared to profit from it.

One way would be to buy the ProShares Short High Yield (SJB) fund. The fund seeks daily investment results that correspond to the inverse of the daily performance of the Markit iBoxx $ Liquid High Yield Index.

Let’s go to the weekly chart.

At the top of the page is the iShares iBoxx $ High Yield Corporate Bond ETF (HYG). It is up about 10% from its December 2018 low, but several warning signs have appeared in the price action.

Note the recent doji star candles. A doji is a candle with narrow opening and closing range. It suggests indecision and after a long uptrend or downtrend, the possibility of a shift in investor sentiment. It is a potential reversal candle.

When multiple dojis form after a strong move they increase the likihood of a reversal. Three consecutive doji candles are called a “tri-star” pattern which is a strong reversal signal. That is not currently the case because we’re looking at a weekly chart and the last candle is not completely formed. But keep a careful eye on this week’s candle.

Below the HYG chart is the ProShares Short High Yield (SJB) chart. Remember it corresponds to the inverse of the high yield corporate index. It correctly looks like a mirror image of the HYG. The previous dojis on this chart suggest the potential for a low of some duration, and an eventual shift in the trend.

The moving average convergence/divergence indicator for the SJB is making a bullish crossover. The crossovers on this chart have, in the past, been infrequent and generally last over the intermediate term to long term.

The bottom line is that the level of corporate debt remains high. When rates inevitably begin to rise and prices start to fall, the SJB will head higher, potentially much higher. Be vigilant and be prepared to profit.

Friday’s Market Reversal In Context

On Friday the DJIA went from being down 400 points to closing up 100 points. The broad based reversal formed what looked like hammer candles on the daily charts of all the indices. The hammer candle is usually a bullish indication, but context and confirmation are required before price patterns or indicators can be traded.

Regarding context, we noted Friday on Twitter that large spinning top candles formed on the weekly charts. The spinning top is a candle with a narrow opening and closing range situated at the center of a candle with large upper and lower wicks.

It represents an attempt by a stock or index to move higher which is followed by failure to hold higher levels, and an attempt to move lower followed by a failure to hold lower levels. The close ultimately returns to and closes in the area where it opened, suggesting basically, indecision.

The market appears, however, to have made a decision, at least, in the early going of Monday’s session.

This Pattern Has Marked Highs In The Russell 2000 Since October 2018 — Another Just Formed

All the significant highs that were made on the Russell 2000 (RUT) chart, going back to October 2018 have been signaled by an eveningstar candle pattern.

Most readers know what a candlestick pattern is and what it suggests about trader sentiment. The eveningstar is a three day reversal pattern that starts with a large up-day candle, is followed by a narrow opening and closing range”doji” candle, and is completed by a large down-day candle. This sequence suggests a transition in trader sentiment from bullishness, to a neutral stance, to finally bearishness.

Note the eveningstar formations on the daily Russell 2000 chart. They have marked highs in October and November last year and high in February this year. Another eveningstar has formed this week just below horizontal resistance in the 1607 area.

If there is a repeat of the price action that has followed the formation of these patterns in the past, then the small caps are headed lower.

Caterpillar Shares At A Critical Inflection Point

Caterpillar (CAT) is a component of the Dow Jones Industrial Average (DJIA) and, as such, is a good measure of the condition of the traditional industrial sector. It’s machinery is used in mining, agriculture, infrastructure rebuilding, and many other areas of heavy construction.

Another aspect of Caterpillar’s importance is as a measure of the world economy, particularly, the China and emerging market connection. The use of its equipment to power the growth in those developing areas.

So, the direction and momentum of Cat’s stock price is an important analogue to the health of the US industrial market and the world economy.

On the weekly Caterpillar chart, the stock can be seen making a series of higher highs and higher lows this year. The MacD reflects the positive price momentum and trend and Chaikin money flow suggests continued buying interest.

Shares were rejected last month after reaching a downtrend line drawn off an early 2018 high and another important high later in the year. This week the uptrend line that held the advance this year is undergoing a hard test.

The rally this year can be seen in more detail on the daily chart. Note the price action over the last month. A head and shoulders top has formed with the neckline intersecting with the uptrend line, and the 200 day moving average.

On this time frame price momentum as measured by the RSI is declining and money flow is neutral. The $133.50 level appears to be critical support at this point in time.

The measured downside move of the head and shoulders pattern projects a retracement to the $123 area, which would erase a good portion of the 2019 rally.

We Have Arrived – Time For the Market to Retreat?

The S&P 500 index is back to its September 2018 high. It has managed to retrace all of that late year decline. This means that traders who held on and rode out the volatility of the last five months are back to even. The adroit traders who sold near the highs last year and were prescient enough to time the low and re-enter the market, those folks are sitting on a pile of profit. Ironically, both of these traders will look took book their positions at the current highs.

It is basic market dynamics. The harrowed holders are relieved to be back to even, and the agile traders are proud to take profits. Old highs which are potential resistance seems like a good level to close out positions.

Yes, there will be those who may have missed out by selling at the lows. Some of those folks will buy the new highs because of fear of missing any more, but that strategy, at this point in a market cycle, often fails.

Mentioned in the video pinned at the head of this page, we expect the market to pullback, possibly significantly, from its current level. As Jim Cramer explained when RightView Trading was featured, once again, on the “Off the Charts” segment of Mad Money, we also expected this run.

At the time, which was early February this year, most traders were fixated on the 2800 resistance level, but we thought it would be broken and the 2018 highs would be revisited.

But, we also stated at the time that after the return to the new highs there would be a pullback, a potentially deep one that could over time, revisit the December lows. Why? Because of past consolidation patterns after long term rallies.

The weekly logarithmic chart of the NASDAQ Composite shows 12 and 15 month consolidation periods in 2011 and 2015-16 respectively. Currently, the market may only be 9 months into a similar process. This leaves plenty of time for erosion. If new highs are not made, traders and investors will lose confidence. Market sentiment and momentum can shift suddenly.

Time will tell. As we noted on Off the Charts the lines of support and resistance on the S&P 500 index chart should remain valuable technical levels to monitor.