Bond Market Faces Big Test

JC Parets
February 7, 2019

From the desk of Tom Bruni @BruniCharting

Tuesday we posted a mystery chart and asked you all to let us know what you would do. Buy, sell, or do nothing?

The majority of responses had a bearish bias, however, a few suggested buying the "failed breakdown" with a tight stop, and even fewer said wait it out. Both sides could prove to be right depending on the timeframe, but it's clear the mixed signals make it tough to have conviction.

Let's get into the real chart and why we feel it's relevant.

The chart we originally shared was a an inverted daily line chart of the iShares Core US Aggregate Bond ETF (AGG).

The corrected chart below shows Bonds at an important inflection point. After confirming a failed breakdown and breaking out of its downtrend late last year, prices have rallied back into former support as momentum diverges. While this suggests some short-term weakness may be ahead, it doesn’t negate the long-term improvements made by the 200-day beginning to rise and momentum transitioning into a bullish range.

Click on chart to enlarge view.

The question now is do they consolidate through time at the upper end of this range before continuing higher? or does this short-term failed breakout and momentum divergence cause prices to settle back into a wider range between 105-107.20?

We’re watching closely because of its potential inter-market implications, but like Equities, there are mixed signals in the market that make it tough to have a directional view at the index level.

With that said, there continues to be opportunity under the surface of these markets, so we'll continue to focus on those until the data becomes more clear regarding the direction of these asset classes as a whole.

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Thanks for reading and let us know if you have any questions!

Allstarcharts Team

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