Elliott Wave Analysis of Junk Bonds (JNK) by Sid from ElliottWavePredictions.com. Click on the charts twice to enlarge.

From a purely technical standpoint, I’ve rarely seen a more compelling intermediate-term short setup than in junk bonds right now.

A 5-wave non-overlapping impulse down though March 2009 was followed by a choppy, overlapping, corrective recovery in 3 waves (black ABC), reaching a common .707 fibonacci retracement level. Wave C (black) of the corrective zigzag was a contracting ending diagonal, evidenced by the MACD and internal wave structure. The diagonal ended with a textbook 5th-wave (blue) throw-over back on January 25. That was followed by a 5-wave non-overlapping impulse to the downside through February 7, and a subsequent corrective .618 retracement though February 27. Since then, we may have seen a second (nested) bearish 1-2.

The table is set for the old trendline extending from the extremes of blue 2 and 4 of the ending diagonal to be broken to the downside, and if the projected pattern shown on the weekly chart is correct, JNK is due a large 5-wave structure to the downside, ending below the March 2009 low, thereby completing a 5-3-5 (ABC) zigzag at Primary degree.

Alternatively, if the March 2009 low was actually the end of a large degree structure that started in Y2K, and the movement up from there was the beginning of a large degree impulse to the upside, black A on the chart would labeled black 1, and black B labeled black 2 instead. Even if that were correct, and I don’t think it is, the contracting diagonal since October 4 2011 would be a leading diagonal for blue wave 1 within a super bullish black wave 3. However, diagonals are typically deeply retraced, so a downward correction of at least .618 of the rise since October 2011 would be imminent.

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