A Three-Headed Dog Not Medusa Spooks the Market

October 4, 2016

Mish's Daily

By Mish Schneider

mdaily20161005Not a happy market image: A skeleton and a sardonic grinning bear head strategically placed beside rusty medieval hardware.

Monday night we mused on Medusa and her ability to turn the Rallysaurus we’ve enjoyed since February into stone.

Coming into today’s session, we gave the market the benefit of the doubt.  After all, two of the key indices and five out of six Modern Family sectors had done little, trading within the trading range of last Friday.

Perhaps Medusa herself didn’t halt the rally with a lethal glance. Clearly though, some other insidious creature crept onto the back of our Rallysaurus and spooked him.

If not Medusa then, who?

For starters, we already have had several concerns about certain insidious factors at play.

One worry coming into today: While NASDAQ continued to run, both the Dow and the S&P 500 are in warning phases.

Secondly, although the Russell 2000 and NASADQ are bullish, they could not rally above resistance levels or what I call reversal topping patterns. Furthermore, today the NASDAQ made another new high and failed.

Yesterday, Semiconductors after posting new all-time highs, closed on the intraday lows with better than average daily volume. Today, a reversal top could be in the works.

But perhaps our most insidious creature of all appears as an innocent Grandmother. Retail, a holdout on the most recent rally, lingers uncomfortably close to a major breakdown.

However, putting all of that aside, the real culprit today is actually a trifecta of events.

Resembling Cerberus, Greek mythology’s three-headed dog that guarded the entrance to the Underworld, firmer interest rates, a stronger dollar and weaker gold prices came thrashing down upon the Rallysaurus’ back.

Nonetheless, let’s not lose sight of the extraordinary powers the market has exhibited thus far. After all, until the market actually does stare Medusa in the face, a Rallysaurus skeleton can regenerate its own skin.

How might that happen?

If the Cerberus monster’s three heads of rising rates, a robust dollar and falling gold prevents Granny from entering the Underworld-voila!

S&P 500 (SPY) Pivotal point 215 then 212 rock bottom support

Russell 2000 (IWM) Working a reversal top unless it gets back/closes over 124.75. The 50 DMA at 122.50

Dow (DIA) 184 to clear and must hold 180

Nasdaq (QQQ) Must close over 119 and hold 117

KRE (Regional Banks) After 2 Inside days now above the 50 DMA this was a bright spot. 42.50 pivotal

SMH (Semiconductors) 67.90 some support.

IYT (Transportation) Cleared 146, made a high of 147 then sold off. Always on the alert for a reversal top to confirm or not when that happens.

IBB (Biotechnology) Closed just below the 50 DMA. 290 pivotal

XRT (Retail) I won’t get excited until this closes over 44.00. Nor will I get super negative until it closes below 42.90

IYR (Real Estate) Crash landing on the 200 DMA

GLD (Gold Trust) Did not expect this bloodbath. However, we exited our long position we held since January. Now, lots of support a bit lower and will wait.

GDX (Gold Miners) 22.98 the 200 DMA

USO (US Oil Fund) 10.80 the support to hold.

TAN (Guggenheim Solar Energy) Between 19.80-20.05 support area now tested

TLT (iShares 20+ Year Treasuries) 133 recent low. 136.50 overhead resistance

UUP (Dollar Bull) Until it closes over 25 or under 24.60 I’m neutral

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