foxex: Stock and Junk Bond Traders Hesitate Together

Chart Advisor | Focus on the Price

Thursday, March 14, 2019

1. Boeing's nosedive holding at support

2. S&P 500's spinning-top doji

3. Junk bonds hit resistance

Major Moves

Boeing (BA) has been in a nosedive since the tragic crash of one of the company's 737 MAX planes in Ethiopia last Sunday.

The stock was initially able to recover much of the ground it lost on Monday after opening at $371.27 – which was 12.13% lower than the stock's close price of $422.54 on Friday, March 8 – climbing all the way back up to close at $400.01.

However, in the days since, as more countries have grounded all 737 MAX planes in operation, BA has dropped back down to test support as traders wonder if the company is going to be able to resolve the autopilot concerns passengers have before too many airlines cancel their orders for the plane.

So far, Indonesia's Lion Air and Garuda Indonesia have informed BA they will be cutting their 737 MAX orders, and Flyadeal (Saudi Arabia), VietJet (Vietnam) and Kenya Airways (Kenya) are actively evaluating whether they want to modify their current orders.

According to Bloomberg, BA has outstanding orders for more than 5,000 737 MAX planes, valued at more than $600 billion. If more airlines start reducing, or cancelling, their orders, BA could be in a world of hurt as traders are forced to negatively revise their revenue and earnings growth expectations.

Looking at the daily stock chart for BA, it appears the key price level to watch is ~$371. As with so many support and resistance levels, we aren't going to be able to define the exact level of support down to the penny, but we don't need to get quite that granular.

You can see that the stock has interacted with the $371 price range on multiple occasions, going as far back as late-February 2018 when the stock hit resistance. It hit resistance at this level again in mid-June, mid-September and early-November 2018. The stock was also consolidating just below this level in late-January 2019 before breaking higher on January 30 after the company beat earnings expectations for Q4 2018.

This price level is now holding as tenuous support. BA has dropped below $371 in intra-day trading, but it has so far been able to rally and close above $371 each day.

If the company can fix its navigation system and get its birds back in the air soon, support may hold. But if BA drops and closes below $371, it will be a strong signal that traders are cutting their losses, and the stock may be in danger of revisiting its late-2018 lows.

S&P 500

The S&P 500 continues to knock up against resistance at ~2,816. After jumping up to a new 2019 intra-day high of 2,821.24 on Wednesday, the index didn't do much of anything today – closing at 2,808.49.

In fact, the index moved it such a tight trading range today, it formed a spinning-top doji.

Spinning-top dojis are the ultimate illustration of uncertainty. They form when traders try to push prices higher but can't make much progress. They then try to push prices lower but don't have any luck there either. Ultimately, they just allow prices to drift right back to where they started the trading period – hoping they may get more of a catalyst, bullish or bearish, the next trading period.

Based on the trend the S&P 500 has been in during 2019 and the higher low it established last week, the index still has an excellent chance of breaking higher, but it may take an economic announcement or some other news alert to provide the catalyst to push it through.

Read more:

How Boeing Makes its Money

The Top 4 Boeing Shareholders

Candlesticks and Oscillators for Successful Swing Trades

Risk Indicators - Junk Bonds

Just as the S&P 500 is hitting resistance, so too are junk bonds, and that could spell trouble for stocks.

Junk bonds are corporate bonds with a credit rating from Standard & Poor's (S&P) of BB, or below, or a credit rating from Moody's of Ba, or below. The lower a company's credit rating, the more likely it is to default on its debt.

Junk bonds are a great proxy for confirming trader confidence because to buy them, traders have to be confident the economy is strong enough to enable the companies that are issuing the bonds to make good on them.

At the end of 2018, traders seemed to have lost all confidence in junk bonds. But they seem to have reversed course in 2019. Using the SPDR Bloomberg Barclays High-Yield Bond ETF (JNK) as a proxy for junk bonds in general, you can see the dramatic V-shaped reversal the fund made as junk bond prices plummeted in December 2018 only to fully recover in January 2019.

After climbing as high as $35.72 three days in a row from February 26 through February 28, JNK pulled back and found support at $35.40 on March 7 before resuming its uptrend.

Interestingly, JNK is currently holding below resistance, just like the S&P 500.

This tells me traders are not yet confident enough to test new highs.

High-Yield Bonds: The Pros and Cons

Are High-Risk Bonds Too Risky?

Bottom line: Stocks and junk bonds moving together

If JNK can break through its resistance level at the same time the S&P 500 breaks through its resistance level, it will be strong confirmation that the bullish uptrend of 2019 still has plenty of momentum left as Wall Street continues to climb the wall of worry in the face of "Brexit" and U.S.-China trade uncertainty.

Market Milestones as the Bull Market Turns 10

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