Featured Trade (U.S ETF): High yield bonds at risk of shaping a major bearish breakdown

U.S. junk bonds may see further downside pressure.

Medium-term technical outlook (1-3 months) on SPDR Bloomberg Barclays High Yield Bond (JNK)



Key technical elements

  • The SPDR Bloomberg Barclays High Yield Bond ETF (JNK) is designed to measure the performance of public issued USD dominated high yield corporate bonds (above average liquidity) that are rated below investment grade and referred to as “junk bonds”
  • Since its 41.70 major swing high area of Jun 2014, the JNK has been evolving within a long-term cycle descending channel with its lower boundary coming in as a support at 29.27/28.20 which also confluences with a Fibonacci projection/retracement cluster (see weekly chart).
  • Since its breakdown on 31 Jan 2018 from its major bearish “Ascending Wedge” configuration that has taken form from 27 Jun 2016 low of 34.47 to 27 Jul 20117 high of 37.46, its price action has been capped right below the upper boundary of the long-term cycle descending channel acting as a resistance at 36.06 (see daily chart).
  • Momentum studies from both longer and medium-term time frames remain bearish where the weekly RSI oscillator continues to inch downwards below a corresponding significant resistance at the 51 level. The daily RSI oscillator has dipped down into its oversold region but without any clear sign of a bullish divergence.
  • The next medium-term supports to watch will be at 33.60 (61.8% Fibonacci retracement of the previous major up move from Feb 2016 low to 27 Jul 2017 high) and 32.70/60 (the median line of the long-term cycle descending channel from Jun 2014 high & a Fibonacci retracement/projection cluster).

Key Levels (1 to 3 months)

Intermediate resistance: 35.75

Pivot (key resistance): 36.06

Supports: 35.03 (trigger), 33.60 & 32.70/60

Next resistance: 37.60/38.20 (long-term pivot)

Conclusion

JNK is in the process of shaping a potential medium-term impulsive down move sequence. If the 36.06 key medium-term pivotal resistance is not surpassed and a daily close below 35.03 reinforces a further potential down move to target the next support at 33.60 with an extension towards 32.70/60 next.

On the other hand, a clearance above 36.06 invalidates the bearish scenario for a multi-month corrective rebound to retest the 37.60/38.20 long-term pivotal resistance zone.

Charts are from eSignal



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