HYG: Flashing A Dangerous Diamond

It should not be surprising that HYG is showing a rather clear version of the various topping patterns playing with the equity indices and certain sector ETFs.

What does make HYG’s Diamond Top at least a little surprising, and certainly interesting, is the fact that it has been trading out for more than two months now as compared to a little more than two weeks.Put otherwise, as the Nasdaq Composite has traded up nearly 10% over the last two months, HYG has simply consolidated for an essentially flat performance over the same time period and it is this type of spread that may be some indication of downside volatility to come in the risk assets with the aforementioned topping patterns providing the perfect path down.

Prior to looking at the downside case of HYG’s Diamond Top, let’s turn to its potential upside scenario that confirms at $91.29 for a target of $93.65 and a target that should be treated seriously if HYG closes above that upside confirming level. Relative to its more proper downside case, it confirms at $88.93 for a target of $86.57 with both the potential confirmation and fulfillment carrying special bearish significance.

As can be seen in either of the two charts above, a possible confirmation of HYG’s Diamond Top would more than take HYG down below its 50 DMA and an event that has brought about some pretty decent drops over the last year while a fulfillment of that pattern would take HYG close to its 200 DMA with past precedents suggesting that such potential proximity could produce an outright spike down.

Such a possibility would seem to make sense in the context of HYG’s bearish Rising Wedge that appears to be trying to confirm and fulfill toward its target of $75.17 with the Diamond Top at hand to set this bigger bearish pattern in motion.

Unless HYG confirms its current consolidation to the upside, then, it seems that HYG is flashing a rather dangerous Diamond.