Dear Reader,

Today’s essay is written by my friend and managing editor, Mike Merson.

Mike and I have worked together for the past three years. He reads everything I write. And, he has developed a strong understanding of technical analysis and trading patterns.

Mike offered to take a little bit of work off of my overloaded plate this week and he penned today’s essay. You should know that he sent me this essay BEFORE I mentioned to him that I was planning to write something about the high-yield market this week. His analysis is EXACTLY in line with my thinking.

Please enjoy today’s Market Minute…

The junk bond sector is sending a strong message to stock investors…

Get out.

It’s been a while since we’ve looked at the junk bonds. But, as veteran Market Minute readers know, they can be a useful short-term indicator for the direction of the broad stock market. That’s because junk bonds grant a higher yield than US Treasurys.

So, when the market’s in “risk on” mode, and investors are buying stocks into overbought conditions, the junk bond sector tends to lead that move.

And, when the market is about to shift into “risk off,” you also tend to see that action start in the junk bond market.

That’s the signal we’re getting right now…

Take a look at this hourly chart of the iShares iBoxx High Yield Corporate Bond Fund (HYG)…

As you can see, there’s significant divergence on the various momentum indicators (the MACD, RSI, and CCI) at the bottom of the chart. They’ve all made lower highs while HYG moved higher from its last peak in mid-June. That tells us that momentum is slowing, and a change in trend is imminent.

And, if you take a look at the price of HYG, a bearish descending triangle pattern is forming. These patterns form when the price of an asset makes a series of lower highs while bouncing off a similar support level. These patterns tend to resolve to the downside.

On hourly charts, patterns tend to play out over the shorter term – anywhere from a few days to a few weeks. So, when HYG falls beneath its major support line of about $86.65, that should act as a prelude to an uglier downturn in the stock market.

Just take a look at the two charts below, of HYG and the S&P 500…

Note the blue circles on the chart. They show where the action in HYG has led the action in the S&P 500. The green circles show what the S&P did afterward.

Right now, we’re seeing one of the biggest divergences between the S&P and HYG in the last six months…

If you ask me, that says investors should take their gains from the market’s June/July recovery off the table.

Regards,

Mike Merson
Managing Editor, Market Minute

P.S. This action in the junk bond market is another sign the stock market may be on its last leg…

And as Jeff has been cautioning readers, he sees a market crash coming before the end of the year… which means investors are going to lose a lot of money.

But traders – especially those who use Jeff’s strategy – will not only survive the coming market crash… but profit off of it. And as a Market Minute reader, you can watch Jeff’s urgent presentation where he reveals the exact date he sees the market crashing. Click here to watch this video now, before it gets taken down.  

Reader Mailbag

Today, a longtime subscriber thanks Jeff for sharing his knowledge…

I have subscribed to your option trading service for several years now, including your Mastermind sessions… The markets these days seem to move so much faster and often totally reverse during the day. Being burned by holding on for better prices has made me more jumpy to exit quickly, even when I have it going the right direction.

Often these are trades I do on my own, using the technical analysis you have taught me, picking other trades moving similarly, not with the ones you show targets for. I really appreciate you sharing your wealth of knowledge and experience with us and I am definitely a much better trader because of it! Thank you!

– Greg

What do you see coming in the stock market? Do you see a crash, or something else?

Let us know… along with any other trading questions, suggestions, or stories at [email protected].