The Market’s Butterfly Effect

July 11, 2018

Mish's Daily

By Mish Schneider

blankI am thinking of writing the famous Chinese Astrologers who use Chinese symbology for the upcoming year and its implications for the market.


It’s really eerily spot on this year.

To repeat from Monday night’s Daily:

The “experts” expect weakness in real estate, mining and tech. They expect transportation (IYT), communication, and shipping not to fare well.

Yet, wood (WOOD), fashion (XRT), media (CBS), the environmental industry (NEE, FSLR) and entertainment (NFLX, WWE), should outperform.

Furthermore, last night in our Tower of Power or Twin Peaks Erosion? commentary, we wrote,

“Should Semiconductors continue to take the lead, it would, at the very least, be a reason for the bears to retreat. However, should the last-minute tech buyers dry up and bring out the sellers, expect twin peaks erosion.”

And that was before the announcement of the $200 Billion more in tariffs.

So why a photo of a butterfly?

One reason is they migrate to avoid adverse conditons.

Secondly, butterflies, like the market, have lifecycles.

Therefore, how is the market, with all of the astute warnings by Chinese astrologers, migrating from adverse conditions into a new lifecycle?

If you guessed my lead answer might involve Transportation, you are right!

Transportation (IYT) broke the 200 daily movning average for the second time in the last couple of weeks to enter an unconfirmed Distribution Phase.

The 50-week MA is at 185, so technically, until we have a closing week under that level, this could be another example of the buyable dip.

However, let’s look at the other sector that was first to decline and the one who gave the bulls false hope yesterday.

Semiconductors (SMH).

Today, SMH re-entered an unconfirmed Warning Phase. It could stop falling should it hold around 103.50.

If so, the place to retake is 105.50. Yet, it could also fail 103.50, and test the 200 DMA at 102.88.

If SMH follows her brother Tran down the 200 DMA failure trail, expect to see a lot more selling.

But also keep eyes on the noteworthy indices.

All are in confirmed bullish phases.

The Dow, back from the Distribution Phase it was in 2 weeks ago, is the most vulnerable.

On the flipside, NASDAQ is the strongest.

Consistency is important, which is why you read so much about Transportation, Semiconductors and the rest of the Modern Family here each day.

Let’s call it, the Butterfly Effect! Once action can lead to a chain reaction.

When IYT flaps its wings, it causes a tornado many miles away. If SMH flaps her wings in kind, we could see an indices tsunami.

S&P 500 (SPY) Doesn’t look that bad since it’s far enough away from the 50 DMA. 275 area to hold with 273 the 50 DMA. Over 278.40 way better

Russell 2000 (IWM) 166.11 is the 10 DMA to hold and back over 168.38 better

Dow (DIA) Very close to the 50 DMA so must rally or else

Nasdaq (QQQ) Did so much better than the other 3. Now, if can back over 177 may be a big help to everything. Otherwise, looking at 173.50 to hold

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