Dumping the Junk?

01/31/2013 10:00 am EST


Thomas Aspray

, Professional Trader & Analyst

Pundits have been predicting the demise of the 30-year bull market in bonds for the past few years, and MoneyShow’s Tom Aspray examines the charts for signs whether it is now imminent or not.

Stocks moved lower Wednesday as while some were disappointed by the weak GDP it was the FOMC announcement that triggered more profit taking. It was not a surprise that the Fed announced that that they were going to stick with their bond buying program and blamed slowing in the economy on the weather.

Nevertheless the losses were minor as the Spyder Trust (SPY) held above Tuesday’s low at $149.67 and closed barely above $150. There are some signs of deterioration in the short-term A/D indicators but no signs of a meaningful top. Typically, before a top is formed, we would expect to see a sharper pullback like a close below the prior three-four day lows. This should be followed by another rally that could move the SPY to new rally highs.

There were some interesting developments in other markets as two of the biggest junk bond ETFs were down significantly on quite heavy volume. I had cautioned income investors not to buy the junk about two weeks ago as the risk was not worth the yield.

Overall, rates have been moving higher as the yield on the 10 Year T-Note moved above 2% on Wednesday. So what does this mean for bond holders and income investors, let’s take a look.

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Chart Analysis: The daily chart of the SPDR Barclay’s High Yield (JNK) shows the wide range yesterday and the close below the daily starc- band.

  • JNK is now only down 1.4% from its highs.

  • The current yield is 6.78% and the spread between its yield and the 10 year T-Note is still at historically low levels.

  • The short-term 38.2% Fibonacci support from the November lows is at $40.67.

  • The more important 50% support is at $40.44 with the quarterly pivot at $40.51.

  • The daily OBV has dropped below its WMA as volume Wednesday was three times greater that the average.

  • The OBV is already close to next support, line b, which goes back to the October and December highs.

  • Both the weekly and daily OBV did confirm the recent highs.

  • There is initial resistance now at $41-$41.24.

The iShares iBoxx High Yield Corporate Bond (HYG) also closed near its lows and below the September 14 high at $94.04. HYG has a current yield of 6.45% up from 6.38% just last week.

  • There is next support in the $93.60 area and the October highs.

  • The daily uptrend, line d, is at $91.75 with the major 38.2% Fibonacci support from last June’s low now at $91.64.

  • The volume was also heavy in HYG on Wednesday and the daily on-balance volume (OBV) has dropped below its WMA.

  • The OBV was unable to move above last September highs, and therefore has formed a negative divergence, line e.

  • There is initial resistance now in the $94.50-$94.75.

NEXT PAGE: How High Will Yields Rise? |pagebreak|

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The daily chart of the 10 Year T-Note Yield shows that yields broke through the trend line resistance (line b) and the 2.00% level on Wednesday.

  • This confirms the uptrend in yields, line c, that goes back to the low in July 2012.

  • There is next resistance in the 2.10% area.

  • The daily downtrend, line a, is now at 2.30% and a daily close above the March 2.36% high would be the first sign that the major trend has changed.

  • There is first key support now at 1.83%, which is the mid-January low with more important 1.67%.

The Ultrashort Lehman 20+ Year Treasury (TBT) has rallied sharply from its twin lows in the $63.78-$63.86 level that were made just over a week ago.

  • The quarterly R1 at $68.15 has been reached with the weekly starc+ band at $70.69.

  • The weekly downtrend, line d, is now at $73.17.

  • The weekly OBV broke through several month resistance (line e) at the start of January.

  • The OBV retested its rising WMA on the recent correction and has now made new highs.

  • There are signs from the OBV that an important low may be in place.

  • There is initial support now in the $66-$66.70 area and then at $65.

  • The quarterly pivot is at $63.25.

What it Means: The sharp drop in these two very popular junk bond ETFs on high volume may be an early warning that a top is being formed. With prices at the lower starc bands, I would expect prices to move sideways or bounce over the near term. If these ETFs make new highs, most of the technical studies will not confirm the price action.

The rise in yields has gotten quite a bit of attention this week, but as I recently discussed in my longer-term outlook it will take much higher rates to confirm that the long-term bond bull market is over. That said, rates do appear likely to grind higher over the next month or so and may test major resistance.

How to Profit: No new recommendations, but junk bond holders should have a firm plan in place for their holdings.

Portfolio Update: Should be 50% long the ProShares Ultrashort 20+ Treasury (TBT) at $64.48 and 50% long at $63.88. Use a stop now at $62.92. Sell 50% of the position at $70.24 or better for a 9.4% profit.

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