The Myths and Truths of the Market’s Wild West

April 18, 2017

Mish's Daily

By Mish Schneider

Pull into Pinos Altos, NM and get a sense of the old Wild West.

Trade the current market and also get a sense of the old Wild West.

Both the market and the Wild West are fraught with myths and truths.

Determining what is myth and what is truth makes them difficult to figure, while at the same time making them full of intrigue.

For example, the California Gold Rush of 1849 was not the first, but the third gold rush.

The gunfight at the O.K. Corral didn’t amount to much nor did it take place at the O.K. Corral.

The whiskey served in the saloons was strong stuff made of a combination of raw alcholol, burnt sugar and chewing tobacco.

Well, that’s true.

Navigating the market seems as tough as it was for the folks navigating the Western Expansion via Wagon Train.

One minute traders plod along a clear path. The next minute, they are shut down by outlaws.

Occasionally, a group traveling by Wagon Train thwarted a robbery. They planned ahead and came prepared.

How can traders likewise thwart big losses?

For starters, understand which timeframe you are analyzing and have a trading plan that matches that timeframe.

Looking at the Russell 2000, no doubt the daily chart has broken down. However, following Monday’s inside day with a small move to the upside on Tuesday, it closed unchanged. Day or active traders must prepare for either more bounce or a short.

Should IWM break below 133.66 expect more downside. Should IWM trade above 136, prepare for a pop.

On the weekly chart, IWM is in a bullish phase. If you are an intermediate trend trader, consider standing aside while IWM corrects and consolidates.

Should IWM correct further, prepare for a buy against the 50 week movng average. If IWM rallies from here, rather than risk down to the 50 WMA, use the March lows as a solid risk point.

On the monthly chart, IWM is trading inside March’s trading range. The takeaway is that long-term swing traders should still hold a bullish bias, but considering the recent erosion, exercise patience before adding any new longs.

Another example, let’s borrow a myth from the Old Wild West-the gold rush of the 21^st century.

From 2005-2011, the first 21^st Century gold rush occurred. The second and less spectacular gold rush occurred in 2016. In 2017, the monthly chart indicates a continuation to the upside.

On the weekly chart, a continuation appears more likely as gold is in a bullish phase.

On the daily chart, gold moved out from a base that dates back to the November election.

In all timeframes, gold looks higher. Yet, I have read several predictions that gold is heading down to $700.

For the Russell 2000, traders await to see if an economic expansion is myth or truth.

For gold, traders make their way to the bar and await to see if the stress is myth or truth.

S&P 500 (SPY) 2 inside days. 235.24 is the 50 DMA to clear and 232 the spot to hold

Russell 2000 (IWM) 132.40 is the 3/27 low to hold with a lot of resistance up to 137

Dow (DIA) 203.81 the 3/27 low with 206.65 the 50 DMA to clear

Nasdaq (QQQ) Must hold 130.40 and clear 131.75

KRE (Regional Banks) 51.17 key to hold

SMH (Semiconductors) Warning phase. 77.67 the 50 DMA

IYT (Transportation) Inside day. 158.18 the 3/27 low and 163 big resistance