December 11, 2016
By Geoff Bysshe
The primary market indexes, DIA, SPY, QQQ, and IWM all closed higher on Friday, but the modern family is hinting that the market may need a rest very soon.
When you review the descriptions of the condition of the major sector and asset class ETF at the end of this article you’ll find the word ‘doji’ appears more often than usual. Perhaps this shouldn’t come as a surprise considering grandad IWM has a doji pattern too.
The ‘doji’ pattern (open and close at the same price) means “indecision”, and when it comes after a multi-day run it can often indicate the market needs to rest or even reverse.
Additionally, the “inside day” pattern appears quite frequently in the descriptions of the sectors below. The inside day is pattern where the current day’s range is completely within, ‘inside’, the prior day’s range. This can have the same effect on an extended trend as the doji.
Furthermore…youngest brother, SMH, just narrowly averted the dreaded label of “key reversal” on Friday! SMH has been a market leader since the summer, but it took beating from Trump’s election.
Like a good leader, SMH bounced right back to new highs, but on Friday’s its weak action on a strong market day, suggests that the beating may take longer than a week to heal.
Fortunately, with so many new good looking market leading sectors, the bull market doesn’t need SMH to tow the line any more.
However, when you add up all the doji’s, inside days, and SMH’s action, it’s not the same picture you see in the DIA, SPY or even the 5th day in row that the IWM closed over its prior day’s high (not just higher, but over the prior day’s high!).
This Wednesday the Fed will, presumably raise the Fed Funds rate and insignificant amount.
More importantly it will also hold a press conference in which the market will get a chance to react to what it thinks the Fed is likely to next.
For the areas of the market beginning to pause now, this will set up plenty of time for consolidation leading into Wednesday. And consolidation creates a good condition for a big reaction to the press conference.
If you’re looking for a prediction of which direction this reaction will go, don’t ask. Brexit, the U.S. election, and last week’s shake up in Italy should serve as an enough examples of why you should simply follow the market patterns, not predictions or expectations.
S&P 500 (SPY) For the fifth day in a row it closed over the prior day’s high. Look for support at 225.70 and 224.25.
Russell 2000 (IWM) Daily doji pattern (open and close at the same price) means “indecision”. Short term caution under 137. Look for support at 135.80, with a multi-day pullback opportunity near 134.
Dow (DIA) Look for support around 195.50 – 196.00
NASDAQ (QQQ) 119.65 is the all-time high to break. If it breaks with a 30-min. O.R. breakout it could lead to big trend up day here. As I’ve said, but doubted it would, this has some catching up to do. A pull back should find support at 118.
KRE (Regional Banks) Inside day and doji after a long run is a good time to look for consolidation. Be patient.
SMH (Semiconductors) Very close to a key reversal at a prior high. Additionally, our Real Motion indicators suggest it may have trouble moving higher from here. I expect it to consolidate with support levels at 71.50, 71 and 70.20.
IYT (Transportation) Thursday it sold off they recovered. Friday it rallied than came back. If you put the 2 days together you you’d get a big doji pattern which suggests a rest is needed. A pullback to the 10-day MA seems like the prudent pattern to wait for.
IBB (Biotechnology) Friday further build my case that, the 262 area should be good support, and if the other areas of the market calm down this may pick up. I’d wait for it to clear 275.50 before considering it.
XRT (Retail) Inside day after a strong 4 day run could mean time for a rest. Watch for a pullback. Should be support around 47.15 and it must hold 46.80 area.
GLD (Gold Trust) Ugly looking down day, but 110 should be a big support level. The key range is 110 up to 112.50.
GDX (Gold Miners) Consolidation continues. Key levels to break are over 22 and under 20, otherwise it’s just waiting.
USO (US Oil Fund) Nice confirmation of Thursday’s reversal. 11.50 is resistance to watch for, and the big number to clear is 11.80. Also interesting at 10.80 support.
TLT (iShares 20+ Year Treasuries) Thursday I asked…” Stuck in a range? 117.60-120.60.” Friday’s close of 117.50 dismissed that, and it is the first close under 118 since July of 2015. 118 has been an important swing level so if it does not revers quickly look for 115 to be then next target for the down trend.
UUP (Dollar Bull) Bullish trend is in gear, watch for resistance at the 26.35 highs. Should be support around 26.
Every day you'll be prepared to trade with: