U.S. High-Yield Corporate Bonds ETF in Jeopardy

The High-Yield Corporate Bonds ETF (HYG) is in jeopardy at major resistance.

The monthly chart below shows that price is facing double resistance at the confluence of a 60% Fibonacci retracement level at 89.29 and the upper edge of a large triangle formation (both of which began forming during the 2007/08 financial crisis to the 2009 lows).

Major support sits below at the confluence of the 50% Fibonacci retracement level at 83.98 and the triangle apex around 83.30.

The momentum indicator has dropped below the zero level on this timeframe, hinting of more weakness to come, as has been the case, historically.

The next monthly chart shows price action of HYG compared with the S&P 500 Index (SPX).

HYG began to diverge from the SPX as far back as April of 2013 and looks like it's getting ready to roll over again.

The momentum indicator has recently spiked and is at an all-time high on the SPX.

The gap in price action between these two began to accelerate right after the 2016 Presidential election, and is ever widening as SPX spikes in parabolic fashion.

If HYG drops to or falls below its major support around 83.30, we could see some serious selling afflict, not only the SPX, but also other major indices.

If that happened, the chances of the SPX reaching 3000 anytime soon (as I wrote about here) may be in question, so keep an eye on other factors that I mentioned in in my 2018 Market Forecast post.

SPX 3000?

Year-to-date gains/losses made in the 9 Major Indices and 9 Major Sectors  are shown on the graphs below...amazing gains after only 15 trading days.

The SPX is already over half-way to the 10% target I had forecast in this post for the entirety of 2018.

An extended outlook for the SPX sees major resistance at 3000 (its next "Big Round Number"), which is confluent with two external Fibonacci retracement levels (2984 and 3047), as shown on the monthly chart below.

When would it hit that level? It's anyone's guess, as anything seems possible in the current buoyant market environment. The momentum indicator is still rising on this long-term timeframe and is making new all-time highs in the process. Another 5% gain would send it up to that price, so we could be looking at a year-end target date to bring total gains of 11% by then...not an unreasonable expectation.

Another scenario is that it could reach that level around August of this year (pinpointed at the pink arrow shown on the second monthly chart below), which would put it at the +4 standard deviation level of a very long-term upward-sloping regression channel (beginning from the March 2009 low). That would give it plenty of "wiggle room" to allow for some price dips in between now and then. At the moment, price is in between the +3 and +4 standard deviation levels.

Alternatively, we may see a hit of 3000 (or beyond to its next major external Fibonacci level of 3047) at the +5 channel deviation level sometime in February, potentially taking the Dow 30 along with it to around 26,700 (as I described recently in this post). Subsequently, these indices may move sideways for awhile to allow some of this parabolic surge (that began after the November 2016 Presidential election) to dissipate.

Other factors to monitor, in this regard, are outlined in my above-referenced market forecast post.

2017 Market Wrap-Up

This post will outline how the U.S. Major  Indices, Major Sectors, S&P 500 Index and the SPX:VIX Ratio performed throughout 2017 and how they ended the year.

U.S. MAJOR INDICES

The following 1-year daily charts and year-to-date percentage-gained/lost graph show that all Major Indices, except Utilities, are trading well above their 50-day moving average, and that Technology made the most gains, followed by Transports, Large-Caps, Small Caps, and, Utilities.

MAJOR SECTORS

The following 1-year daily charts and year-to-date percentage-gained/lost graph show that all Major Sectors, except Utilities, are also trading above their 50-day moving average, and that Technology gained the most, followed by Materials, Industrials, Consumer Cyclicals, Financials, Health Care, Consumer Staples and Utilities, while Energy ended, essentially, flat, at -0.89%.

S&P 500 INDEX

The following four charts of the S&P 500 Index will depict how 2017 ended, on a yearly, quarterly, monthly, and weekly basis.

Each candle on the following chart represents a period of one year.

2017 extended gains made in 2016, mostly remained above 2250, and finished the year on an extremely bullish candle. Momentum hit an all-time high on this timeframe by year-end.

Each candle on the following chart represents a period of one quarter.

Each of the four 2017 quarters gained on the prior one, without much of a pullback in each. Momentum has yet to make a new swing high on this timeframe since it peaked in 2014.

Each candle on the following chart represents a period of one month.

With the exception of March, each candle closed higher, with a bit more candle overlap. Momentum also closed out the year at an all-time high on this timeframe.

Each candle on the following chart represents a period of one week.

There are several minor pullbacks evident throughout 2017 and some profits were taken in the last two weeks. Momentum dipped a couple of times, but remained above zero, and ended in strong uptrend.

SPX:VIX RATIO

The following four charts of the SPX:VIX Ratio will depict how 2017 ended, on a yearly, quarterly, monthly, and weekly basis.

Each candle on the following chart represents a period of one year.

2017 extended gains made in 2016, and finished the year on an extremely bullish candle (illustrating low volatility), as it closed about 20 points off its all-time high. Momentum hit an all-time high on this timeframe by year-end.

Each candle on the following chart represents a period of one quarter.

Volatility rose on this timeframe, as evidenced by the long tailed candles, as price remained, essentially, above 150. All candles, except Q4, closed higher. Momentum hit an all-time high in Q3 and remains strong.

Each candle on the following chart represents a period of one month.

Half of the 12 candles closed higher (on moderate volatility), but the general trend is still up. Momentum is still in strong uptrend on this timeframe, as an all-time swing high was made in October.

Each candle on the following chart represents a period of one week.

Zigzag price action illustrates higher volatility on this timeframe, as some profit-taking occurred several times this year, but remains in uptrend. Momentum closed the year below zero, after spiking to an all-time high at the end of October.

SUPPORT & RESISTANCE LEVELS

SPX

The SPX is mashed up against major resistance in the form of an external Fibonacci retracement level, as shown on the Monthly chart below. It's also trading above a +2 standard deviation level of a long-term uptrending Regression Channel (formerly major resistance/now support around 2600).

Such a channel breakout has not occurred since it began at its lows of 2009, so any further buying that occurs at/above these levels would be unusual and, potentially, lead to over-exuberant parabolic spikes.

The next major support level sits at 2485 (a confluence of two external Fibonacci retracement levels and the +1 channel deviation level. A pullback of 7% from its 2017 closing price of 2673 would send it down to that level.

SPX:VIX Ratio

Price on the following Monthly ratio chart of SPX:VIX closed in the lower half of the long-term uptrending (green) channel.

It will be important for price on this ratio to reach and hold above the 280 major resistance level, and for the SPX to hold above its near-term 2600 major support level, in support of a convincing argument that favours the sustained entry of the SPX into a new bull-market phase.

Otherwise, if price drops and holds below major support at 200, expect volatility to increase dramatically and weakness to set in on the SPX.

CONCLUSIONS

2017 was a year of low to moderate volatility (depending on the timeframe), but managed to generate steady quarterly gains in the SPX through to year-end. In last year's Market Forecast for 2017, I had anticipated an increase of around 11% in equities, in general, as well as low volatility. In fact, the S&P 500 Index closed out the year 19.42% higher (20.16% at its highest for the year on December 18).

Technology and Large Caps led the markets to new highs throughout the year (supported by a strong Financials sector), while Small Caps made modest gains, in comparison.

Next year's U.S. mid-term Congressional election, coupled with two to three possible interest rate hikes, will likely generate an increase in market uncertainty and volatility. So, we may see larger weekly swings occur, and, possibly, a 7% pullback at some point, to generate an overall increase of about half of what we saw in 2017...to propel the SPX approximately 10% higher to around 2940 by year-end.

A LOOK INTO THE FUTURE

In closing, I'd mention that my Market Forecast for 2018 can be found at this link for further details. Since writing that post, the following record-breaking news arose:

The S&P 500 Index came within 5 points of hitting 2,700 and the Nasdaq Composite Index hit 7,000 on December 18. In my post of November 26, 2016, I had projected an SPX target of 2,700 (in anticipation of the 2020 Presidential election), so, to see it nearly hit three years early illustrates what an unusually strong year this has been).

President Trump signed the Tax Cuts and Jobs Act on December 22 (the new lower corporate rate of 21% will take effect January 2018). Following this, many major companies announced pay raises and bonuses for employees, as well as plans to hire more workers and increase infrastructure spending.

Of course, I realize that a forecast is, simply, one possibility of many. However, it can be a useful tool in order to track, assess and learn from one's future successes and failures on a short, medium and long-term basis. And, it can be modified/updated during its duration, depending on world and domestic influences at the time.

I wish you good health and prosperity in 2018!

Happy New Year 2018!

Market Forecast for 2018: More Volatility & Political Uncertainty

In last year's market outlook for 2017, I anticipated a rise of around 11% in U.S. equities, in general, to place the S&P 500 Index at just above the 2400 level by the end of the year (my post was written on December 1, 2016, so my calculations and forecast hadn't incorporated a further 80-point rally that occurred during that month until year-end).

In my post of November 26, 2016, I was projecting a rally in the SPX to around 2700 by the next U.S. Presidential election in 2020. Markets have certainly been much more robust this year than I anticipated, as this level has almost been hit already. It rallied to an all-time high of 2657.74 on November 30 and closed on December 1 at 2642.22.

At the time of writing this post on December 2, you will see that, of the 9 Major Indices, the S&P 500 Index has gained 18.02% year-to-date, as shown on the first graph below, while the Nasdaq 100 and Nasdaq Composite Indices have gained the most, and the Russell 2000 and Dow Transport Indices the least.

With regard to the 9 Major Sectors, Technology has gained the most year-to-date at 32.84%, with six others at around 20%. Consumer Staples gained 10.77%, while Energy has far underperformed at -5.06%.

All of these Indices and Sectors are currently trading, either above, or well above, their 50-day moving averages, as shown on the following 1-year daily charts.

Without repeating myself with respect to three articles that I posted recently, I'd just direct your attention to the conclusions that I made here regarding the Tech Sector (XLK), Consumer Cyclicals (XLY) and Consumer Staples (XLP) in connection with strengthening/weakening consumer spending into year-end and next year, as well as effects from potential upcoming Fed interest rate hike(s).

Additionally, I'd re-iterate the comments I made here regarding world money flow in the U.S. Financials, versus European and Chinese Financials and their respective major resistance levels.

Finally, please note the comments I made here regarding the (actual past and potential future) effects of political legal machinations and political legislative drama on the SPX and VIX, and their price/technical levels to monitor in the week(s) ahead.

CONCLUSIONS:

I understand that tax cuts contained in the Senate tax bill (that was just passed on December 2) don't begin until 2019. If this time frame is agreed to by the House and ratified by the entire Congress by the end of this year, we may see markets take some hefty profits in early 2018, in protest, as, no doubt, they were expecting them to take effect in 2018, judging by this year's hot market.

If this scenario were to happen and, taking into consideration the uncertainty that next year's mid-term elections will bring, coupled with likely interest rate hikes, I'd project that we'll likely see volatility rise in 2018 and the SPX (and the other 8 Major Indices) gain only about half of what they gained this year. This would mean an approximate increase of 10% for the SPX. I expect Technology to remain fairly strong, and Small-Caps may struggle more than Big-Caps. Nonetheless, I anticipate that the U.S. markets will continue to outperform other World markets (keep an eye on the performance of their Financials, as I noted).

With respect to the S&P 500, Nasdaq 100, and Russell 2000 Indices, I'd watch to see whether the following major support levels can be held on the following Index/Volatility ratios (note their corresponding Monthly ratio charts below)...a breach of those important levels could produce the sell-off that I mentioned above:

• SPX:VIX Ratio -- 200
• NDX:VXN Ratio -- 350
• RUT:RVX Ratio -- 80

Good luck next year! 

P.S. You can read other 2018 Market Outlook articles (written by fellow contributing writers to Investing.com), as well as mine above, here (Part I) and Part II here.

N.B. See my 2017 Market Wrap-Up post for a final look at how and where the year ended, as well as, further details on what to watch for and where the market may be headed in 2018.

* UPDATE December 23...

RECORD-BREAKING NEWS:

• The S&P 500 Index came within 5 points of hitting 2,700 and the Nasdaq Composite Index hit 7,000 on December 18
• President Trump signed the Tax Cuts and Jobs Act on December 22 (the new lower corporate rate of 21% will take effect January 2018)...following this, many major companies announced pay raises and bonuses for employees, as well as plans to hire more workers and increase infrastructure spending