How Charts Are A Trader's Canvas

November 5, 2015

Mish's Daily

By Mish Schneider

de Kooning, one of the most influential artists of the 20^th century, believed in order to start from scratch, one must first work through the accumulated influences and then deconstruct those influences.

In market terms, active investors begin each day starting from scratch. However, the decision to buy or sell relates directly to the accumulated influences of the charts. Charts are a trader’s artistic representation of what came before.

How those influences or past price movements get deconstructed very much depends on the “vision” or bias of each individual trader.

Currently, traders are trying to deconstruct a myriad of influences. Some of those influences include: the strength of the dollar, future of US and European interest rates, economic data, earnings plus a glaring division between the good, the bad and the ugly.

Personally, my canvas typically begins with how the Modern Family is doing. As primarily a position swing trader who likes to dabble in day and miniswing trades, I assess my one key index (IWM) and 5 sectors and groups (KRE IBB SMH XRT IYT), then make trading decisions.

Or indecisions.

Other factors that go into my trading decisions are phase, risk/reward, etc. However, the canvas for my swing trades begins with deconstructing the Modern Family-my biggest influence. I assume that how the Family is doing takes into account the myriad of other influences described above.

de Kooning believed that art was a “big bowl of soup” and that “everything is in there already.”

I believe the same is true with charts. What we pull out from the soup bowl is our assessment of everything that preceded current price action.

The Russell 2000s are sitting right within the zone of what I’m calling the “trifecta of resistance.” Regional Banks are close to the 2015 highs. Retail is holding in a strengthening Recovery Phase.

Transportation continues to play out as indecisive follower rather than leader, maintaining sideways consolidation. Biotechnology could push higher if the others do, but right now, it looks vulnerable.

Semiconductors fell hard Thursday, closing back under the 200 DMA.

Deconstructing the Family, many speculators remain sidelined. Semis and Biotechs are where speculative money tends to go. However, money is accumulating in the other areas.

The charts on the Financials and Small Cap stocks look promising.

If tomorrow you are starting from scratch, look at where we are now with the thought that it is because of where we just came from.

The market tested lower levels and rejected them. Possible same could happen with the higher levels as well. If you’re canvas becomes too “abstract” keep a minimalist approach to trading.

Otherwise, note the sectors breaking out, follow the money, decide the risk and paint away!

S&P 500 (SPY) 210 remains pivotal with 213 the big area to clear

Russell 2000 (IWM) The September 17^th spike high, the 65 week moving average and the 100 daily moving average, all converge around 118.50-119.00.

Dow (DIA) 177.40 near term support with 180 the big point to clear

Nasdaq (QQQ) With some digestion, 114.39 the old high, an important level to hold on a weekly basis

Volatility Index (VIX) Fear subsided

XLF (Financials) Needs to clear 24.55

KRE (Regional Banks) 45.62 the 2015 high. 43.60 level to hold

SMH (Semiconductors) Closed under the 200 DMA making 54.22 pivotal

IBB (Biotechnology) 327 important level of support

XRT (Retail) Looks better with the September 17^th high to clear 47.68

IYR (Real Estate) Holding the 200 DMA at 75.75 Through 77.04 like it for an active trade

ITB (US Home Construction) Has spent 5 weeks trading around converging moving averages-big move one way or another coming

GLD (Gold Trust) Will this be a case of “It’s been down so long it looks like up to me?”

SLV (Silver) A doji day on a valid trendline