DAVE FLOYD: Hey there, traders. David Floyd here with Aspen Trading Group on behalf of Real Vision TV, and the Technical Trade series.
It's been a few weeks since I've had an update here at Real Vision. And I wanted to do something a little different today. And it's more a function of what's happening in the markets. We've certainly entered a phase where we've got some correction off of the highs in the S&Ps and some various other movements from a technical perspective. And that is completely changing the dynamics of what's happening in the market. So, rather than addressing one specific technical trade setup, I want to provide an overview of what I'm seeing not only in the S&Ps but a variety of other asset classes, and then offer up a couple of different trades that fit in to that overall scenario.
Here's the one overriding feature or theme that I see right now, though. I see a period of choppy, non-directional trading. Yes, the S&P, the trend is still up overall. But we are still working out how we are going to resolve the move off the recent highs, off the April, early May highs. Not really sure how that's going to go yet. I'm going to lean towards the default which is to be bullish. But I'm going to show you today that there's a few things that might raise a caution flag, and not necessarily suggest an immediate move lower in the S&Ps, but perhaps more than likely, some choppy, non-directional trading. And I've got some trades that will fit into that quite well.
So, let's first take a look at the S&Ps. First of all, on all my charts, I always have these labels. And unless they're drawn directly on the right-hand side of the chart, these are just placeholders. I grab them as I need them. This is not a support level, that's not an entry level. These are just simply placeholders for the time being. S&Ps, as you can clearly see, we've had that impulsive move higher off of the December lows. We've pulled back off of the highs. I had thought that we had that correction pegged back at the $2800 level. But if you dial in a little bit, let's say you get down to a four-hour chart, this will give you a better perspective.
This move right here, pretty tough to call that an impulsive move. Maybe it morphs into something else. But at this point, it's really hard for me to get my head around that and trying to rope in and being really, really bullish on a move higher in the S&Ps. So, at this point in time, I'm neutral on the S&P is awaiting further evidence. I think it's wise that we do so until we do get some more evidence.
Now, looking at some other factors that I want to bring in here. And this is more of the macro view here. And I've cited this in a few instances on these videos. This chart here is simply plotting the spread between the 10-Year Treasury rate and the corporate high yield rates. And basically, as those spreads narrow between the corporate high yield rates and 10-Year rates, as those spreads narrow, that tends to be put a bid onto the market, meaning higher S&Ps as those spreads compress. And you'll notice as those spreads widened over the last few weeks, the S&Ps have moved lower.
Now, what's happening now is that spread as you can see right here, is starting to decline again. We had a hive of the spread of it about 400 basis points, we're now back down to 392 basis points. That spread is translating into a firmer S&P. The question now is, will that spread continue to narrow? And if it does, that will put a bid onto the S&Ps, hence, my reason to be cautiously bullish, but awaiting further evidence.
Now, one other thing that you may want to look at here that is actually perhaps causes a bit more caution is that we're seeing that the spread between the 10 and the 2-Year Treasury Note begin to steepen a little bit. Meaning the rates are coming down on the 2-Year at a faster clip than they're coming down on the 10-Year. That typically, at least historically speaking is tended to mean that maybe the economy is starting to slow, maybe there's some recession on the horizon. That doesn't seem to be the case. But this is worth paying attention to, as that spread continues to widen, that at the very least, is probably going to cause some volatility in the S&Ps. And probably meaning moves one way or the other until we get things sorted out. So, this is on my radar screen to as well.
Now, in terms of individual stocks, again, trying to stay with an overall bullish outlook here. But Microsoft is quite interesting. And again, I think if you stick with the overall bullish bias, I think that we're in the early stages of a correction here. I'm going to blow this chart up a little bit just so we can get a little bit more granular. Off that December 2018 low, I'm counting three waves up at this point. And then this is a clearly, a corrective move. I've seen some people say that this is the completion of Wave 4 right in there. I don't buy that for two reasons.
One, the S&Ps have not completed their correction as far as I can tell that hence, Microsoft which tends to be a bellwether, or at least a barometer or a proxy for the S&Ps. If the S&Ps worked out how they want to finish up this correction, Microsoft is not likely to move higher. But more importantly, from a technical perspective, if you look at Wave 2, it was a very simple correction, very shallow correction. In terms of Elliott Wave, you don't normally get the Wave 2 and the Wave 4 correction to be identical. There's the rule of alternation.
So, I'm betting that this Wave 4 correction is certainly not complete and it's either going to have one more leg lower, which would take us down to probably the 120 area, or what we'll have is we'll get more of a sideways correction in the form of a triangle. So, just consolidate sideways, and we may get that in the S&Ps too. Ultimately, barring some meltdown in the S&Ps, I see Microsoft moving higher, probably up towards 140. And that comes from just a simple Fibonacci projection, measuring Waves 1 through 3. And projecting that from the low of Wave 4, wherever that may be.
If I have Wave 4 completing at 126.08, looks like we're going to be going up towards 140. If Wave 4 completes way down in here, if we have a deeper correction, then we're probably- 142 would be the upper end, but more likely, we'd have 133. Either way, solid moves. If we're 127 right now, we begin to move higher, and we get to 133 or 140, that's a pretty good return. 133 is the more likely target if we dipped a little bit lower in terms of the correction and then moved higher. So, that's Microsoft.
Now, given that I'm looking at the market right now, I'm probably seeing a lot of two-way price action going forward. One, we're going to need to be nimble, very selective and extremely patient. One of the things I think we should consider is a short in HIIQ, which is Health Insurance Innovations. I'm not going to go into the details on the fundamental case, there's a lot of good research out there that suggests there's a lot of shenanigans going on behind the scenes.
The chart clearly shows that prices want to move lower. We're currently trading around $25 a share, I see us going much lower, we could even get down into $10. Clearly off of the highs, we're moving down in an impulsive manner. Five waves off the top here, a correction and Wave 2 that stalled right into the 61.8% retracement, which if you've been following my videos here at Real Vision for any period of time, Wave 2s typically stall at the 61.8% retracement of Wave 1. It did so here. We're once again moving lower in an impulsive manner.
We've rallied off of the lows recently, I'm willing to add to my position or if you're not currently short, I would suggest selling into this position because I think we're going to be going lower in the weeks and months ahead. I can't really give you an absolute price target. But I think we're probably going to be heading down into the $15 to $10 range when all is said and done, if not lower.
One of the things that I look at in these situations where you have maybe some creative accounting, maybe some creative revenue recognition, or just interesting or creative business practices, I always want to look at what the bond market's doing in terms of the default risk of that underlying debt of the company. And as you can clearly see here, and I pulled this off of the Bloomberg terminal, the default risk for HIIQ has spiked. Granted, it's only at about a half a percent right now, they're still considered investment grade at this point in time.
But what's interesting about this is that as the default risk has spiked, prices have continued lower, and then we'll notice that the default risk has come off a little bit in the last few days. And that's corresponded with a little bit of a rebound in the share price that we're seeing currently. I don't think that the default risk has been alleviated at this point in time based on how I view what I'm reading in terms of the fundamental research, and what the company is doing and or not doing. And of course, the chart points to lower levels too. So, I'm going to use this as an opportunity to get short.
What's interesting here, in this particular function, is right now the share price is around 25 bucks. So, I plugged in 25 bucks, and we get the default rate in about .44, keeps the debt rated in Investment Grade 10, at least based on Bloomberg's evaluation of their debt rating. What's interesting is if we did get prices to move down to about 10 bucks, or even, let's say 15, let's say we get down from 25 to about 15. Now, we get that default rate going up to about point .88%. And the rating on that debt now goes to high yield too. So, now we're getting into junk bond status.
Now, as you know with Tesla, as Tesla's bonds have continued to move lower in value, the stock prices eventually caught up. Tesla is now becoming the train wreck that we all knew it was but took forever to take place or to take hold. I suspect the same thing will happen in HIIQ, is that share price drops lower, the bonds are going to be under more pressure and then it just feeds on itself.
So, all I'm trying to do at least in this particular market is come up with a couple of really decent equity ideas. And I think you can be long Microsoft and I think you can be short HIIQ because HIIQ is not going to be dependent upon what the S&Ps are doing. But I think for right now the S&Ps are in a wait and hold pattern. I think you need to pick your spots very carefully. Keep an eye on credit spreads, keep an eye on 10-Year Notes. Gold's moving lower, the dollar's moving higher. There's a lot of moving pieces, euro-dollar futures are moving higher. So, that suggests lower rates. So, perhaps 10-Year Notes are attractive in here.
All I'm trying to say is that there's a lot of moving pieces. The trend overall is not as clear anymore. We're in a correction. And you can see it by the way we have price action up and down all day long, all week long. That's an indication of how you have to be very nimble and not get too married to positions until that trend reestablishes itself either up or down.
This has been David Floyd with Aspen Trading Group on behalf of Real Vision TV. Until our next video. Be careful out there, trade nimbly and trade selectively.