Bonds have continued to be a strong asset class, as interest rates push toward zero and investors and institutions look for safe havens. So, the question is: how much higher can bonds really go from here? Lower-class bonds, commonly called high-yield bonds or junk bonds, are showing weakness and signs of a technical top. Higher class instruments such as Treasury bonds of varied length are still holding though, and showing signs of yet further upside. Here's a look at the upside and downside of four popular bond ETFs.

SPDR Barclays Capital High Yield Bond (ARCA:JNK) ETF tracks high-yield corporate bonds, or bonds of lower quality, for which investors demand a higher yield. Through the summer months the ETF trended higher, but since September it is showing signs of a topping pattern. On an unadjusted basis (chart below is adjusted) the ETF has already broken below the September low ($39.85), indicating further declines. The initial target for the topping pattern is $38.90, although if this turns out to be a major turning point - and it very likely could be - the long-term fall could be much more severe. In an environment where the stock market has turned lower, holding higher risk assets becomes unfavorable; therefore this segment of the bond market appears to have far more downside than upside.

SEE:Support & Resistance Basics

JNK decline


iShares iBoxx $ High Yield Corporate
(ARCA:HYG) ETF is in a very similar position to JNK as it also tracks high-yield corporate bond issues, but through a different index. Once again, on an unadjusted price basis (chart below is adjusted) the ETF has already completed a topping pattern pointing to a further slide. The initial target is $88.92, but if this is a major turning point the decline is likely to be much more severe. Watch $86, as a drop below that means support between $82 and $80 is likely to be tested. A rally back above $94 is unlikely, and if it occurs the breakout is likely to be marginal as the ETF has topped out near $94 the last three years - once again, much more downside than upside.

SEE: Technical Analysis: Support And Resistance

HYG topping pattern


iShares Barclays 20+ Year Treasury Bond
(ARCA:TLT) ETF represents longer term treasuries - "high quality" - and it is moving in a more bullish fashion, at least for now. A pullback in September puts support at $118. A drop below that level, especially if a new price high (above $132.22) isn't made before it occurs, is bearish with a price target of at least $114. But the rally in November has broken a short-term down trendline signaling there is still some strength left here. The upside target is $135, which would create a new 52-week high.

TLT bullish


iShares Barclays 7-10 Year Treasury
(ARCA:IEF) ETF, reflecting medium-term Treasuries, has also had a good November putting it very near short-term resistance. The ETF has been ranging between approximately $109 and $106.40 (unadjusted), so if the advance continues and the ETF can hold above $109 the target is $111.50. On the other hand, a drop below $106.40 signals a decline to $104.

SEE: Interpreting Support And Resistance Zones

IEF bullish


The Bottom Line
Not all bonds are the same, and varying segments of the bond market are setting up very differently. While there still appears to be upside room in Treasuries, a turning point will come; watch support levels as a breach signals a longer term reversal may be underway. In the meantime, the bulls still have the upper hand in Treasuries, and there is little need to fight the trend. If you are looking for a weaker market, high-yield bonds look to have already turned lower. The topping patterns provide some initial targets, but there is potential for further declines if the short-term reversal turns into a long-term turning point.

Charts courtesy of stockcharts.com

At the time of writing, Cory Mitchell did not own any shares in any company mentioned in this article.

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