Muni Bombs

Regular readers should be comfortable knowing investment price patterns develop, repeat and understanding the reasons why. A great example of this can be seen in the US Muni bond ETF, MUB. Over the past 7 years, a head and shoulders topping pattern has formed 4 times. Of the first 3, only two actually played out to or beyond the pattern’s lower target. The middle one failed and reversed strongly higher (“from false breaks come big moves”) where it went on to make pattern #3. Interestingly, all of the first three formed their peak (head) when RSI momentum (the upper pane) entered and then exited the overbought region which is not the case in the current. Muni bond holders want to keep an eye on the present pattern and insure price holds at or above the neckline otherwise risk the possibility of much larger decline.

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If you change the time frame on above chart to 5 years instead of 7 thereby removing the first pattern nearest the left edge of the chart and clean it up a bit something interesting appears … a  4+ year head and shoulders topping pattern.  

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As you can see, it still has some room before it reaches its neckline and the pattern could trigger. Take a look at volume in the bottom pane. Notice how during the 2015 selloff from the head, you started to see big green bars as it broke below the neckline, an indication the big institutional buyers were stepping in. If I were a Muni bond holder right now I hope to see those big buyers step in once again as/if we approach those same levels. If not, I will be thanking the investment gods above I am not a holder of any Muni bonds as it could just be bombs away lower.