Corporate bonds ETF ($LQD) continues rise toward higher Fibonacci extension levels

LQD which is an ETF for the higher-quality corporate bonds has continued to rise above one Fibonnaci extension level after another. This month it's even moved above $110.75 which was the Fibonacci 1.786 extension of the "drop range" which you can see on the monthly chart (at bottom, below). One potential next level would be $113.77 which is the 1.91 extension of that range. That's not a common Fibonacci extension, but since LQD exceeded the 1.786 extension, it's worth looking at. Another would be doubling the "drop range" and that would take LQD to $115.99. It's worth considering this possibility, given that this move up would be 1.382 times the length of the first big rally up from $66.73, if and when it reaches $115.34. But, there's another potential Fibonacci level that may be in the way.

The move up from the origin of LQD on the monthly chart, if used as the basis for a 1.618 Fibonacci extension level, would point toward a range of 110.80 to 112. The exact number is difficult to pointpoint, and is also subject to some error because we cannot be certain if the point of origin is the correct "low point" to use for Fibonacci analysis. However, if it is a valid starting point, then it's quite possible that LQD is already "in the zone" for a Fibonacci-extension topping point. In this regard, it becomes more concerning that the RSI levels on the daily and monthly charts show it's been entering overbought territory.

The daily chart (first chart below) shows that there's negative divergence in the indicators. While that isn't encouraging, the potential Elliott Wave pattern suggests that it still has another fifth-wave push higher that it could make, even if there's some volatility along the way. Still, I marked an apparent price channel with light blue trendlines, so we can see if this price channel contains any consolidation or correction that LQD might make in its apparent quest for a price level above $115. Conversely, if a topping pattern appears from the area around $111, then we might start to ask if this is more of a "B" wave that may not support a final 5th-wave extension.

The light blue trendlines are at a steeper angle than the darker blue trendline. This can be consistent with LQD being in a "third wave up". If so, then any larger consolidation or correction that remains above the darker blue trendline could also be a (potentially larger) fourth-wave consolidation, preceding a final fifth-wave push up toward the $115-116 area. Meantime we'll be on the alert if a reversal pattern starts to appear around the $111 area. Here are the charts:



While the rise of LQD in particular and corporate bond prices in general may seem an incredible move, looking at the monthly chart, the fact is that its price has exceeded the 1.786 Fibonacci level and potentially the $111 area too, so that's an indication that it may still be able to push higher before being turned back more significantly by higher resistance. Maybe investors are seeing corporate bonds as higher quality than government bonds, and who could really be surprised by that concept these days?! On the other hand, for big investors who are looking at whether to add to portfolios, the upside may be somewhat limited. It may be more a matter of holding, and adding incrementally on dips and pullbacks.

While volatility may pick up as the upside becomes more limited and there's deceleration in the upward movement, we don't see a reversal pattern yet. So this is merely an "early warning" that investors may start to keep a lookout for if/when LQD and higher-quality corporate bonds start to reach a more significant extension level, perhaps above $111 or $115 in LQD. Then, a reversal pattern (selling on volumes and the initiation of lower lows, with clear deterioration not only in the daily chart but also the monthly chart) would provide sell signals. Something to keep an eye on during the rest of this year.

From a fundamentals perspective, whenever LQD starts to change trend from the clear uptrend it's been in for a long time, would be adverse to equities. This is because it would signal a change toward increasing borrowing costs for companies. Certainly not a harsh change, but simply moving from a tailwind to a (slight) headwind. It wouldn't be much of a problem for companies with strong balance sheets and solid, growing earnings.