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These Beaten-Down Bonds Could Be Roaring Back to Life

Investor watching the change of stock market on tablet.; Shutterstock ID 1036200037; Project: b

This year, we’ve witnessed one of the biggest sell downs in stocks.

But regular stocks weren’t the only assets to suffer from this domino effect.

The 2022 selloff spread to junk bonds too.

On March 17, we saw how the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) was caught in a strong downtrend (red arrow on the chart).

And despite some countertrend moves, HYG’s overall trend remained down.

But after a strong fall from a short-term rally in May, HYG’s chart pattern has begun to transition.

So, today I’ll discuss what moves we can expect from here and assess some potential trades.

Let’s check out HYG’s chart…

iShares iBoxx $ High Yield Corporate Bond ETF (HYG)

Source: eSignal

You can see HYG’s clear downtrend. The 50-day moving average (MA – blue line) has been trending lower since the start of 2022.

On January 10, that downtrend was confirmed when the 10-day MA (red line) crossed down below the 50-day MA.

Another tell-tale sign of the downtrend was the Relative Strength Index’s (RSI) action.

Apart from HYG’s peak in late May (A), the RSI has mostly tracked in the lower half of its band (below green line).

That peak quickly reversed when the RSI formed an inverse ‘V.’ From there, the RSI continued to track into the lower half of its range and HYG’s stock price fell heavily.

However, the chart’s action since June has caught my eye. It shows HYG’s potential transition out of a downtrend.

Take another look…

iShares iBoxx $ High Yield Corporate Bond ETF (HYG)

Source: eSignal

On June 13, HYG’s downtrend petered out as the RSI went into oversold territory (lower grey dashed line).

Then, HYG formed a short-term base (orange line) as the RSI formed a ‘V,’ and began to trend higher (red line). Since then, the RSI has bullishly broken back into the upper half of its range.

And recently, our two MAs have also shown some bullish signs.

For the first time since January, the 10-day MA has crossed back above the 50-day MA.

So, what can we expect from here?

Well, if HYG maintains its momentum and the RSI stays in the upper half of its band, then the next target for HYG is to take out its recent peak (A) at just over $80.

This would prove the rally is turning into a genuine uptrend that could provide a potential setup for a long trade.

However, if the RSI inverses and then tracks lower, then any HYG rally will come to an end. In that case, we could then enter a short trade as the RSI tracks back to support.

After rallying strongly, the RSI is now closing in on overbought territory (upper grey dashed line).

So, in the coming days we’ll need to keep a close watch on this level to decide our next move.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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