What This Crossover Signal Means for Bonds

When the Fed pivoted to a more dovish tone on interest rates late last year, the value of existing bonds began to soar.

But it wasn’t just government bonds that enjoyed a strong bounce.

The iShares iBoxx $ High Yield Corporate Bond ETF (HYG) is an ETF that invests in high-yielding corporate bonds. And it also rallied strongly off its yearly lows.

But after topping out in December, HYG drifted lower, making a series of lower highs. A more hawkish stance from the Fed recently exacerbated that move.

Now HYG is struggling to regain momentum. So let’s check what’s coming next…

Trading Flat

In the chart of HYG below, the 50-day Moving Average (MA, blue line) shows just how flat HYG traded until September last year.

You can see that tight rangebound pattern in how closely the shorter-term 10-day MA tracked the 50-day MA throughout that period:

iShares iBoxx $ High Yield Corporate Bond ETF (HYG)

Source: eSignal

The two MAs then began to diverge in September as HYG fell…

That down move also coincided with the Relative Strength Index (RSI) dropping into the lower half of its range.

But as HYG’s fall continued into October, a converging pattern began to appear, hinting at a reversal…

While HYG was making lower lows (upper orange line), the RSI was tracking higher from oversold territory (lower orange line).

When momentum builds like this, it will eventually stop a stock’s fall…

And that is what we saw.

HYG burst higher as the RSI broke up through resistance (green line) and into the upper half of its range.

You can gauge the strength of that up move by the rate at which the 10-day MA crossed and accelerated above the 50-day MA.

But after peaking on December 27, HYG reversed and has since trended lower, making a series of lower highs.

That peak coincided with the RSI making an inverse “V” and falling from overbought territory.

Take another look:

iShares iBoxx $ High Yield Corporate Bond ETF (HYG)

Source: eSignal

Then after testing support multiple times, you can see that the RSI has recently fallen back into its lower band (red circle).

And the two MAs have been closing in on each other since late December. The 10-day MA could cross beneath the 50-day MA in the coming week.

So what am I expecting from here?

Gathering Momentum

For HYG to rebound higher from here, it needs a solid uptick in momentum. And with the RSI now likely to retest resistance, what happens around this level will be key.

If the RSI fails to break higher and instead gets stuck in its lower band, then we can expect HYG’s slide to develop into a bigger down move.

That could soon see HYG testing the $76 level.

We’ll also closely watch the action of our two MAs this coming week.

If the 10-day MA crosses and accelerates beneath the 50-day MA, that will show that HYG’s emerging downtrend is gathering momentum.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict