Junk bonds had a bad day yesterday.
While the S&P 500 continued to levitate near all-time highs, the high-yield bond market got hit with some selling pressure. The iShares iBoxx High Yield Corporate Bond Fund (NYSEARCA:HYG) dropped 0.36%.
Skeptics will scoff at that action. They’ll say HYG is up more than 12% for the year so far. A one-day loss of 0.36% is nothing.
But… it could be a big deal.
The last time we looked at HYG, we noted the chart had formed a bearish rising wedge pattern with negative divergence on the MACD and CCI momentum indicators.
This pattern usually leads to a breakdown – which would mean a selloff in the high-yield bond market. And, a selloff in junk bonds usually leads to a decline in the broad stock market.
Here’s an updated look at the chart I first showed you three weeks ago…
For the past three weeks, HYG has been chopping back and forth in a tight trading range. It’s clinging just above the support line of its rising wedge pattern.
This choppy action has caused all of the various moving averages to coil together. So, there’s a lot of pent-up energy available to fuel a big move.
And, it looks to me like that big move will be to the downside.
Yesterday’s 0.36% decline caused HYG to close below the support of all of its various moving averages. By itself, that’s not all that big of a deal. But, with HYG also threatening to break down from a bearish rising wedge pattern, yesterday’s decline could be an ominous warning for the junk bond sector.
It looks to me that if HYG closes below $86.20 anytime over the next few sessions, then we’ll have a decisive breakdown from that pattern and junk bonds will be headed lower.
And, if junk bonds head lower, then the stock market should follow close behind.
Best regards and good trading,
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