The market has a big junk problem and it’s very evident when taking a close look at the chart of $JNK, the high yield bond ETF. It’s been a brilliant technical indicator as of late and was one of the signals employed in fading the rally earlier in the week.

Note that $JNK has been on a steady uptrend for the better part of a year when suddenly it made a lower high in January while $SPX kept ignoring it and went on to make new highs. Not listening to $JNK was a mistake on the side of market participants. $JNK signaled trouble was brewing and once markets finally caught on it was all over.

In process of the correction $JNK broke a key supporting trend line and this proved to be a key signal this week:

Note the 2 attempts to recapture the trend line these past 2 weeks. Both attempts failed precisely at the trend line and each time produced selling in markets including this week.

What does this tell us: Firstly, technicals have worked nicely on this chart. The trend line break is bearish and the failure to recapture the trend line is bearish. Doesn’t mean $JNK won’t try again, and it if does it’ll be bullish for markets, but without a recapture it’s not good news for markets and this trend line is moving away, so bulls need a solid rally to emerge to race up there.

As long as $JNK stays above the 35.70 gap odds for a big rally are improving. Fall below the gap and markets may make new lows or retests lows.

But as long as $JNK remains below the broken trend line markets are having a junk problem.

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