\tJunk bonds rallied a bit to start the week. But on Tuesday and Wednesday, HYG dropped 1%. That’s not a big move for a stock, but it’s a HUGE move for a bond fund. And it was enough of a move to cause HYG to break down from the rising wedge pattern on the daily chart. Take a look…<\/p>\n
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\tHYG broke below the rising support line of the wedge pattern (the solid blue line). It broke below the support of its 9-day exponential moving average (the red line). And it fell all the way down to its 50-day moving average (the thin blue line).<\/p>\n
\tBy Wednesday, it was obvious the high-yield sector was breaking down. And analysts started jumping on board the trade. Firms like Bank of America downgraded the high-yield sector. Big-name market gurus warned of the potential collapse in the junk bond market. Even the talking heads on the financial news networks were talking about it – and they hardly ever mention junk bonds.<\/p>\n
\tThat made me worry. But not in the way you might think.<\/p>\n
\tYou see, my Delta Report<\/em> subscribers owned put options on HYG going into last week. I was confident the sector would break down. The action in HYG on Tuesday and Wednesday justified my confidence.<\/p>\n \tBut, after more than three decades of playing this game, I’ve learned that whenever everyone else – especially the financial media – agrees with my opinion, my opinion is likely to be wrong. At least in the short term.<\/p>\n \tSo, I told subscribers to take advantage of Wednesday’s decline in the high-yield sector and sell half of their HYG put options for a 100% profit. Then we set a stop price on the other half to ensure a gain on that position. HYG was approaching its 50-day MA. It was likely to try to bounce off that level.<\/p>\n \tWhile the momentum was bearish, I was concerned that with so many folks suddenly drawing attention to that bearishness, the market might be getting ready to whip the bears.<\/p>\n \tThat’s what happened on Friday.<\/p>\n \tGo back and look at the chart. HYG bounced hard off its 50-day moving average (MA). It recovered more than half of what it lost on Tuesday and Wednesday. And, it closed above its 9-day exponential moving average (EMA) – thereby shifting the short-term momentum back to bullish.<\/p>\n \tWe stopped out of our remaining HYG put options on Friday, for a small profit on that half of the trade. All in all, my subscribers recorded a 70% gain on HYG put options in just nine days<\/strong>. That’s a terrific return.<\/p>\n \tBut I’m not satisfied. There’s a lot more downside potential in HYG.<\/p>\n \tFriday’s miraculous recovery in the high-yield sector has turned the short-term momentum bullish. And it prevented the weekly chart from breaking down from its bearish rising wedge pattern. Here’s a look at that chart…<\/p>\n \t \tHYG sure looks like it’s on the verge of breaking down from this weekly pattern. But it’s going to take a decisive close below its 9-week EMA (the red line) to do that. In other words, HYG needs to end this week below $87.87.<\/p>\n \tUntil that happens, we can’t rule out one more push higher for the high-yield sector. HYG could run back up toward the resistance line on the weekly wedge at about $88.75. That would certainly punish the folks who got overly bearish on the sector last Wednesday.<\/p>\n \tBut that sort of a move would also set up another low-risk entry point for short positions.<\/p>\n \tSo, here’s the bottom line…<\/p>\n \tThe high-yield sector didn’t quite break down last week… but it’s still on the verge of a significant change in momentum.<\/p>\n \tIf HYG declines this week and causes the weekly chart to close below its 9-day EMA, then be careful. Stocks are likely to follow.<\/p>\n \tOn the other hand, if HYG rallies this week and the chart climbs back up toward the resistance line of its rising wedge pattern, traders can look to establish low-risk short positions in the junk bond market.<\/p>\n \tBest regards and good trading,<\/p>\n \t \tJeff Clark<\/p>\n![\"\"](\"http:\/\/assets.jeffclarktrader.com\/ee-assets\/channels\/articles\/seca2.png\")
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