Traders should pay close attention to the junk bond market over the next few days…

The action in junk bonds tends to lead the action in stocks. So, it’s worthwhile to note that the chart of the High Yield Corporate Bond ETF (HYG) is looking vulnerable.

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Take a look…

HYG closed below its 50-day moving average (MA – the blue line) on Monday. It’s not a dramatic decline …yet.

So, maybe it’s just a quick bluff lower.

But, keep an eye on the shorter term 9-day and 20-day exponential moving averages (EMA – the red and green lines). They’re on the verge of crossing below the 50-day MA. This sort of “bearish cross” often leads to a much more significant decline.

In fact, the last time we got a bearish cross on this chart was back in late February. The junk bond market collapsed over the next few weeks. And, most folks probably remember what the stock market did during that time frame.

So, let’s not get too bearish just yet. It wouldn’t take much for junk bonds to rally back up and push HYG back above all of its various moving averages.

But, if the decline continues – or if it starts to accelerate – and the 9 and 20-day EMAs cross decisively below the 50-day MA, then high-yield bonds are likely headed lower for the next few weeks. And, the stock market will likely suffer the same fate.

So, like I said, traders should pay close attention to the junk bond market over the next few days.

Best regards and good trading,

Jeff Clark

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