From the Desk of Ian Culley @Ianculley
Bonds have stopped falling across the board!
That doesn’t mean it’s time to go all in. Tactically, it’s difficult to get behind this week’s near-term strength.
Right now, we’re looking at just a few days of bullish price action. And where do we define our risk?
We have to know where we’re right and where we're wrong before we get involved in any investment.
Thankfully, high-yield bonds answer this all-important question.
Check out the daily chart of the High-Yield Bond ETF $HYG:
Unlike most bonds, HYG has formed a small reversal formation.
We like the looks of this 4-week inverted head-and-shoulders on the HYG chart. Momentum is improving. And the bulls are reclaiming a key level of former support turned resistance marked by its June lows.
If this trade suits you, keep in mind shorter duration reversal and continuation patterns are more likely to fail. These patterns often grind sideways, forming larger patterns.
And we should also reiterate the importance of those June lows. It doesn’t matter what asset it is. If it’s not above its summer lows, you have no business owning it!
With that in mind, we can only own HYG above 73. We’re long if and only if it’s above there, targeting the May high around 80.
While risks are still to the downside for most US Treasuries, we prefer to take a swing at the bonds that have been basing the longest. For now, high-yield checks that box.
We’ll continue to monitor the rest of the bond market for similar buy signals into year-end.
Stay tuned!
Countdown to FOMC
Following the Federal Reserve's recent 75-basis-point increase, the market is pricing in another triple-hike in November, followed by a double-hike in December.
Here are the target rate probabilities based on fed funds futures:
Click the table to enlarge the view.
This data is from the CME FedWatch Tool as of October 27, 2022.
Thanks for reading. And please let us know what you think.
As always, be sure to download this week’s Bond Report!
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