Flashing of another indicator

At the risk of being looked as a diehard, let me share with you another leading indicator that is flashing violently. And if it plays out (no guarantee of course), the market usually follows not soon after. It is nothing really new as I have talked about it a few times before if you really pay attention to what I say here. I’m talking about junk bonds, which often lead the market by a couple of weeks. And right now, its chart looks scary to my naked eyes, poised to break down at any minute.

If you know some basis for TA, you must know the mostly used momentum indicators like RSI and MACD. Without being too complicated, the simply rule in TA is that a trend is only sustainable if it is also supported by these indicators. If not with a clear divergence, then a trend is often at the risk of turning around either up or down. Right now we are clearly seeing a negative divergence for both RSI and MACD for junk bonds (HYG). This is an early warning sign for a change of the trend direction, which should be down for this time. If you look at the chart for HYG vs S&P for this year, you will probably clearly pinpoint the coincidence of the two each time of a major turning point. Therefore, while everyone seems happy and cheering for the new highs every day, the underlying risk is also increasing for the next few weeks into the late summer. Yes, there was some selling pressure in the past few days but clearly people were just happy to step in to buy each time at little bit weakness. Maybe the real turning point will come only after the Fed makes the first rate cut. Be careful!

By the way, I’m amazed that I’m often being called a bearish guy. No, I’m not. If you don’t believe, can I remind you my call for a 20% gain (the 3000 level) for S&P at the darkest days at the very beginning of the year? How bullish I was?! Please review this blog again to see what I was saying about where the market could go and the possibility of rate cuts over half a year earlier! Now we have already got what I laid out then. Yes, I’m bearish for the next few weeks for sure as I do see an increasing risk for the market right now and that’s exactly the purpose of my blogs to tell you what I’m seeing regardless what others are thinking.  Actually the best you can call me is a swinging guy for my trading. Even though I’m generally bearish right now, I’m still doing bullish trades for selected stocks when I see the bullish side of them. E.g. I took profits last week by being long for AMZN, BA, and INTC for their weekly moves and then I became bearish for AMZN and INTC for this week. As a matter of fact, even though I see a bearish case for the overall market for the next month or two, I do see many stocks showing bottoming patterns, which tells me the sky is not falling for sure and we may still get long with something in a general falling market. BA is clearly one of them and I’m going to tell you another one tomorrow (so stay tuned!). But that kind of trades requires a lot of TA skills and one must be nimble in execution. I’m doing a lot of this kind of trades with weekly options these days for both up or downside betting. But for the general trend of the market for the next few weeks, it is clearly on the verge of turning down, not up in my view. Consider being warned now!