The Key To Being Profitable In 2016

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There was a notable pattern in today’s quiet day

Today's commentary was written by Geoff Bysshe, co-founder of MarketGauge.

Yesterday’s commentary highlighted an intra-day pattern that can tip you off to a market about to rally, and today the same ETF I highlighted yesterday was again the market’s leader. It even provided a pattern similar to the one I discussed yesterday - a strong open in a flat to down market.

The ETF is IBB, it’s still one to focus on, and I’ll cover more on it later.

First, I’ll highlight some important broad market conditions that you should be aware of because they may prove to be indicators of the market’s short term direction.

On the surface today’s market action was a pretty boring. The volume in the SPY, QQQ, DIA and IWM was near the lowest we’ve seen all year. And their ranges were equally as uneventful, but down from Friday’s close and today’s open.

This really should not have been much of a surprise because in 2016 Mondays (and Wednesdays) have been the worst days of the week to be long.

So it being a Monday with very low volume and a tight trading range, I don’t want to read too much into the action of the indexes.

More notable was the continuation of some important sector rotation which could be the key to being profitable in 2016!

If you look at our Sector Summary page in Little Big View (www.marketgauge.com/sectors/) you’ll find that everything was down today except XLV (Health Care) which includes biotech stocks. This is a more conservative group of stocks than those held by the IBB (Biotech) ETF, but its pattern is very similar to the one I highlighted yesterday.

The strength in both of these ETFs today is encouraging for the breakout pattern developing in them.

On the negative side the most noteworthy sector is IYT. This was an early leader off the lows in February, and recently it has been significantly weaker than the market. If its weakness continues it could be a negative indicator for the short-term direction of the general market.

Additionally, as Keith noted in his Market Outlook this week “The Sea Change You Can’t Ignore”, Crude Oil and stocks have broken their correlation. This may sound good for stocks with Crude Oil falling today (USO was down 3.2% and breaking its 50 DMA support), but we should watch out for traders beginning to fear weaker oil should once again lead to weaker stocks.

As I began, the indexes themselves don’t appear to be in any grave danger based on their own price action, but the sectors that have supported this rally should be watched carefully. Additionally, keep your eye out for the sectors that could serve as the new support for any further market gains.

For more on these read the ETF analysis below

And for the traders who are following the market internals… Make sure you keep an eye on the NYSE McClellan Oscillator which is now under zero for the first time since the recent rally began.

S&P 500 (SPY) Inside day and tight range could lead to a trend day on Tuesday. Key levels to watch for resistance are 207.15, 207.80 and 208.50. Key support levels are Monday’s low, 205.89, 205 and Friday’s low around 204.

Russell 2000 (IWM) I’d still use Friday’s range 109.48 – 111.22 as your barometer of this market’s direction for the week. There should also be support at the 110 area.

Dow (DIA) I’d still use Friday’s range 175.41 – 177.85 as your barometer of this market’s direction for the week. There should also be support at the 176.50 area.

NASDAQ 100 (QQQ) The 109.70 level mentioned yesterday held today. A break could mean more weakness, but not serious. Use Friday’s range 108.39 – 110.40 as your barometer of this market’s direction for the week. There should also be support 109.

XLF (Financials) Important support is 22.10, and needs to clear 22.80 to breakout of its range.

KRE (Regional Banks) 50 DMA is finally turning up and sits at 36.42. Between that level and 33.83 it’s stuck in a range.

SMH (Semiconductors) Closed under 55 which was a pivotal support level to hold. Needs to clear 55.40 to be bullish. Be careful under 54.50.

IYT (Transportation) Watch this closely. A break below 139.50 is bearish for it, and could be negative for the general market.

IBB (Biotechnology) Confirmed its Accumulation Phase change with good strength that broke the 272 multi-month base high. However, it closed under 272. There may be a dip to buy coming.

XRT (Retail) My fears in yesterday’s commentary (“I’d be cautious under 46”) came true, and this had some of the most bearish action today. Like IYT this could be a warning of market weakness to come. 45 level should be good support.

IYR (Real Estate) Had good volume on Friday and looks poised to run if it can break 78. The key support level to hold is 77.25.

ITB (US Home Construction) Closed under 3 days of consolidation and the 200 DMA. Further weakness would be concerning and a confirmed negative phase change.

GLD (Gold Trust) Getting ready to move!? Inside day following this analysis from yesterday… Friday’s low touched the 50 DMA for the first time since January. 115-122 is the range to break one way or another. 119 is a significant resistance level.

SLV (Silver) Inside day but also confirms a weak Warning Phase change for the first time since January lows. It needs to get back over 14.50 for me to be bullish again, but the 14 area may be good support and is the area of the 100 DMA.

GDX (Gold Miners) Inside day doesn’t change… Range bound at 18.50-21.00, and March led to a well-defined wedge suggesting the next move may come soon. Relative to its 50 DMA it has held up better than GLD.

USO (US Oil Fund) Broke its 50 DMA at 9.30. Key levels to watch now are 9.60 to break higher and 9.00 as support below its current level.

TAN (Guggenheim Solar Energy) Since January every multi-week turning point and move has been very correlated with USO. Both now sit at good levels to form a swing low, but they need to turn up first! 21.50 in TAN is the key level for it to hold.

UUP (Dollar Bull) 24.40 has been a big support level since May of 2015. A break below it would be a major breakdown.