Junk bonds continue to show positive correlation with the equity markets. In fact JNK and USO have led the moves since March 1. Watching these two assets gives us insight into market direction “before” the majority of traders acknowledge directional changes. Therefore, we will continue to utilize the cues junk bonds and crude administer until the correlation changes.
Crude is marginally higher this morning. As of 8:22AM EST, both West Texas (WTIC) and Brent Crude (CL) are higher by 0.30% (+/-). If prices break out of this 4 hour descending wedge, anticipate SPY, IWM and NDX to follow along.
Junk Binds bottomed early Wednesday, trapping many bears who are not following the correlation. My bias going into the morning session was bearish, but quickly changed once I saw the developing price action in the chart below. This 5 minute chart gave us the perfect “Trade of the Day” signals. Moving forward we see the VBP resistance just overhead, noted with dashed horizontal lines. Anticipate back and fill as we move higher.
The daily chart illustrates our cautious stance. We bounced at the previous Tuesday pivot low (7 trading days earlier = doji), but we are still in what could turn out to be a descending channel, if we are rejected at the 50ma overhead.
If Crude and Junk move higher, SPY should board the train and ride along. Overhead resistance levels are building, as VBP increases in magnitude. RSI is turning on this longer time frame, just shy of our original (assumed) target, the 50ma and 23.6 confluence zone at 232.00.
TICK cumulative can be viewed as rising, with some some trepidation. The change in unblemished slope, compared to January and February is evident. I would read this as too early to tell; either we are seeing distribution or rotation. If we see a bearish cross in this “real time” sentiment indicator, it will be in no small part due to a change in JNK and Crude. Watch all three.
As with any change in character, when we see a large body candle (nearly a Marubozu) like that of Tuesday, we take notice. Our positions become smaller and our focus becomes more critical. As traders, we need to “feel” the ebb and flow of the markets, as experience teaches us we must. Our positions are smaller at this time. Stops are a little tighter as a result. Income plays need to be watched closely (break even point respected) until the “all clear” is given.
Crude is fading as we go to press (-0.10%). Expect back and forth in CL WTIC and JNK.
Pre-market show will be at 9:00AM EST sharp.
Happy Trading – Vinny
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