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Battle of the Wedges - Stocks Versus Bonds

Arthur Hill

Arthur Hill

Chief Technical Strategist, TrendInvestorPro.com

The S&P 500 SPDR (SPY) and the 7-10 YR T-Bond ETF (IEF) are going their separate ways as opposing wedges takes shape and IEF outperforms SPY (bonds outperform stocks). First, note that I am using close-only price charts to filter out some of the noise few weeks. This includes the ridiculous spike low on August 24th in several ETFs, the pop-and-drop on September 9th in SPY and the Fed-induced volatility on September 17th. Instead of intraday noise, I prefer to focus on closing prices and the overall trends at work. 

Let's start out with bonds using the 7-10 YR T-Bond ETF (IEF) as our proxy. IEF trended lower from February to June, bottomed in early June and broke a channel trend line in mid August. The ETF also broke back above its rising 200-day simple moving average. Looks like the bigger trend turned up with this move. After the August peak the ETF corrected back to the rising 200-day and support zone with a falling wedge. It looks like this correction has ended because IEF broke out with a surge over the last two days. This breakout is bullish for IEF and chartists can mark support in the 105.5-106 area. The indicator window shows IEF outperforming SPY as the price relative broke out in August, formed a wedge into September and broke out again last week. 


The next chart shows SPY with a rising wedge, which contrasts with the falling wedge in IEF. As with a rising flag, the rising wedge is potentially bearish because it is typical for a correction after a sharp decline. I elected to draw the wedge trend line from the September 1st low because the August spike looks excessive. The wedge is still rising and this means the short-term trend is still up. I am marking support at the September 4th close (193.78). A close below this level would break the wedge trend line and totally erase last week's pop. Such a move would reverse the short-term uptrend and signal a continuation of the bigger downtrend. 

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Thanks for tuning in and have a great weekend!
--Arthur Hill CMT

Plan your Trade and Trade your Plan
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Arthur Hill
About the author: , CMT, is the Chief Technical Strategist at TrendInvestorPro.com. Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed market technician. Arthur has written articles for numerous financial publications including Barrons and Stocks & Commodities Magazine. In addition to his Chartered Market Technician (CMT) designation, he holds an MBA from the Cass Business School at City University in London. Learn More