Past and Future Between a Rock and a Hard Place

July 13, 2016

Mish's Daily

By Mish Schneider


In the world of trading the island top pattern is as rare a site as is the multi-million year old Taughenbaugh mesa.

A classic example of mountain-top erosion, it was with the same eye we looked at the possible exhaustion gap erosion in the Long Bond. Best guess from geologists is that it took 6 million years to form this mesa that sits in the Colorado River. Lucky for us, we only had to wait 2 days to see if the TLT island top would confirm, hence erode the price.

It did not.

Best to not get attached to a trading idea before its time. Identifying chart and volume patterns, yes. Preparation just in case, yes. Acting before confirmation? No!

Furthermore, in these days of ever-changing relationships, even expecting that if the market sells off Bonds rally and if the market rallies, Bonds sell off is askewed.

Expect Nothing Yet Prepare For Anything.

What I gathered from today’s reading materials, the Federal Reserve Presidents are concerned about a rising US Dollar. Legitimate if a higher inflation target is a criterion before raising interest rates. A strong dollar will wreak havoc on commodities.

Of course until it doesn’t. The ETF UUP sits nearly smack dab in the middle between the all-time low at 21.00 and the all-time high at 27.00. the exact midpoint price is 24.00. Today’s closing price 24.90. One could say it favors more upside. One could also say many commodities have ignored the stronger dollar thus far.

Not the first time we have explored the strong dollar low interest rate phenomenon, the Fed really is between a 6-million-year-old rock and a hard place!

Besides the ongoing dovish Fed policy on rates, the continuing strength in the metals proves the overall lack of confidence. Even with the Dow on new all-time highs, one could see lots of investors remain tentative.

In the spirit of no expectations yet over preparedness, here’s what the Modern Family suggests.

The Russell 2000 (IWM) potentially formed a reversal pattern (new 60+ day high, close in the lower 25% of the intraday low). Note the light volume and again, the need of a second day confirmation.

Preparedness suggests we wait until Thursday to see how that evolves. With little to no expectations of how it will evolve, we neither establish new or liquidate existing longs. Neither do we go short yet.

Similar to the IWM’s pattern and even more daunting looking is both the Retail (XRT) and Biotechnology (IBB) sector candle patterns. Add bearish engulfing to the mix.

However, Semiconductors (SMH) look fine as does Transportation (IYT). With lots of banks about to report earnings, Regional Banks (KRE) held up remarkably well.

Some scientists believe that about 11 million years ago rainwater began to run off into the Rockies. It took another 6 million years to complete the Colorado river system. Beyond that, they know very little about the ancient history of the river.

We know that the Fed induced rally began about 7 years ago. What we don’t know is how long that rally will take to complete. Like the River, the market will continue to flow. Like the River, the more traders try to assess its history, the more complicated the story becomes.

S&P 500 (SPY) Made a new all-time high and closed slightly under. 212.50 support level.

Russell 2000 (IWM) Technically an inside day. 118.64 the 2016 high now support to watch. Over 120.42 more upside

Dow (DIA) Best support 181.78 the runaway gap low. Strong

Nasdaq (QQQ) A bearish engulfing pattern and reversal here too. If confirms see move to 109 next

XLF (Financials) 23.60 substantial resistance with 23.20 first line of support then 23.05

KRE (Regional Banks) 38.75 support to hold. 39.85 the 200 DMA and big resistance

SMH (Semiconductors) 60.13 all-time high. 57.80 area support

IYT (Transportation) 143 good resistance. Support 140

IBB (Biotechnology) 264.85 an intersection of moving averages and now support

XRT (Retail) 43.39 support or Granny could spell trouble

IYR (Real Estate) I liked this since 80.00-so why didn’t we buy it??? A little late now

GLD (Gold Trust) Inside day. Over 128.54 looks good.

SLV (Silver) 19.33 the 200 WMA which matters most at the end of the week.

GDX (Gold Miners) I may not have bought IYR, but I am still happily long this. Looks great

USO (US Oil Fund) Meaningless noise until it changes the 2-year trend down

OIH (Oil Services) Only a move under 27.50 would make me look at this more negatively.

UNG (US NatGas Fund) Another one that needs to clear over the 50 week moving average once and for all

TAN (Guggenheim Solar Energy) 21.40 support held. Back over 21.80 better

TLT (iShares 20+ Year Treasuries) I can’t bring myself to buy up here. But I won’t go short either until we get some confirmed pattern

UUP (Dollar Bull) 25.07 the 200 DMA resistance. 24.70 support

FXI (China Large Cap Fund) Cleared 34.60 the 50 week moving average if holds

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