Junk Bond Bears Need to Watch HYG's 200-Day Moving Average

"Investors pulled $6.8 billion from high yield bond funds over the past week, their third largest outflows on record, Bank of America Merrill Lynch (BAML) said on Friday, as the sell off in junk debt accelerated." -- Reuters, Nov. 17, 2017

As the article linked above details, it's been a rough ride for junk bonds since the European Central Bank (ECB) announced in late October its intent to taper bond purchases. That pain is evident in a daily chart of the iShares iBoxx $ High Yield Corporate Bond ETF (HYG), which sliced cleanly through formerly solid support at its 200-day moving average earlier this month.

Bears appear to smell junk-bond blood in the water, as short interest on HYG ramped up 9.1% in the latest reporting period to hover around seven-month highs. And total put open interest on the fund checks in at 2.09 million contracts, easily dwarfing the 663,539 open call positions on HYG.

Given the rapid, volatile downside movement in the shares over the past month, this surge in pessimism isn't terribly surprising (currently, Trade-Alert places HYG's 30-day historical volatility of 5.3% in the 81st percentile of its annual range). Yet it's worth noting that HYG, in recent days, has not only found its footing near key double-barreled support -- but the ETF has also rallied sharply from this technical floor, simultaneous with a resurgence in net inflows in recent days, per etf.com, that have narrowed the fund's month-to-date net outflows to $97 million.

Specifically, HYG traded as low as $86.22 on Nov. 15 -- the apparent "climax" of its "mini taper-tantrum" sell-off -- but recovered to close the session at $86.68, dead even with the prior session's close. This price point has held up as the post-ECB closing low, which means HYG is still finding support in the vicinity of its year-to-date breakeven of $86.55. (Previously, a minor breach of this level back in March had been contained and offset by support at the aforementioned 200-day moving average.)

And, since establishing its foothold at its 2017 breakeven point, HYG has since clambered back atop its 320-day moving average -- a relatively under-the-radar trendline for many technical analysts, but one that we've found to play a critical role in supporting high-volatility pullbacks in otherwise uptrending instruments.

In the case of HYG, the 320-day briefly acted as resistance during a few days in early July 2016, before going on to mark the fund's lows in August and November. The ease with which HYG reclaimed this moving average following the recent slump suggests that this support level is far from broken. (To get another angle on the significance of this trendline, check out a weekly chart of HYG and the respect it has shown to its 64-week moving average, which is roughly equivalent to the 320-day.)

With two-tiered support swinging into action to cushion the ETF's recent losses, HYG bears should watch the fund's progress around its overhead 200-day trendline -- currently located right around $88 -- very closely. If HYG can reclaim this moving average with the same speed and facility as it did its 320-day, it could prompt an equally rapid change of heart among short sellers and put players.