April 16, 2016
Mish's Daily
By Mish Schneider
“You’ll Never Find a Rainbow if You’re Looking Down”-Charlie Chaplin
Santa Fe, NM photo taken by Mish
A rainbow, like the markets, is not a 2-dimensional image. It’s more like a mosaic, comprised of many distinct bits in 3-Dimensions.
A rainbow appears when the sun is behind you and rain is falling before you. Our eyes see rainbows as flat because there are no visual clues to tell us otherwise.
In the market, our best trading opportunities emerge when the sun is behind us. Meaning, the best trades occur when you have the light or trend in your favor. Rainbows generally happen near dusk as the sun is at the lowest point in the sky before sunset.
In market terms, we can say that the sun at its lowest point before the dark is like assessing the lowest amount of risk on a trade before the lights go out (or you get stopped out.)
What about the raindrops before you?
The “wall of worry” comes to mind. We see the rainbow. We see the rain. We know the rainbow is ephemeral. We worry that the trade will evaporate as easily. How do we deal with that?
Remember, rainbows are not flat; they are 3-dimensional. Unlike a rainbow that appears flat because of the lack of visual clues, our trades do actually offer several visual clues. Chart patterns, volume indicators, market internals, and so forth.
As with trades, how an observer sees a rainbow depends upon where he is standing. Rainbows appear to our eye as half circles. Yet, they are really whole circles. The horizon blocks us from seeing the entire rainbow.
Early last week, I wrote about gold miners. At the end of the week, I featured the Russell 2000.
With GDX, the gold miner ETF, we saw how the technical setup, particularly on the weekly chart, indicated the bottom was in place. The Phase turned to Recovery in February. A month later, the daily chart phase turned bullish.
As traders, our emotional state can function like the horizon, blocking us from seeing the whole rainbow. However, charts function as physical visual clues, helping us to see the whole picture. At mid-April, GDX fashions double and triple rainbows!
In the final moments of trading last week, the Russell 2000 (IWM) marginally cleared the 200 DMA and changed to an unconfirmed Accumulation phase. There’s a good chance IWM will confirm the move over the 200 DMA this week.
Using the weekly and monthly charts to look beyond the horizon, that move could certainly turn out as fleeting. It could also as easily produce multiple rainbows. Or better yet, IWM can take us over the rainbow.
Right before Dorothy sings “Somewhere Over the Rainbow,” she wonders if there is “some place where there isn’t any trouble.” Folks, that’s a movie. Trading unwisely will get you into a lot of trouble. Nonetheless, the takeaway from rainbows and Dorothy is this:
Follow the charts, trade with a stop loss in place and when the trade works, let the “happy little bluebirds” fly you over that rainbow into the Land of Oz.
S&P 500 (SPY) 206.84 point to hold, then 205.50. December high 211.
Russell 2000 (IWM) Unconfirmed accumulation phase-needs to confirm. If not, under 111.86 trouble to 110.25
Dow (DIA) 177.00 the point to hold. Needs another close over 179
Nasdaq (QQQ) 110 support. Has a gap at 111.84 to fill.
XLF (Financials) 22.50 support
KRE (Regional Banks) We got the weekly close above 38.80. Look for that as support and for this to lead w/ IWM
SMH (Semiconductors) 55.65 area the point to continue from. December high 56.99. 54.00 support
IYT (Transportation) 140 support 142 pivotal and over 144 move should continue higher
IBB (Biotechnology) Held in a good spot on Friday. Like a lot over 287.50
XRT (Retail) 45.00 pivotal. 45.70 the weekly MA to clear
IYR (Real Estate) Good close-could have more upside
ITB (US Home Construction) Consolidating after moving out of the consolidation
GLD (Gold Trust) Back to an unconfirmed bullish phase if holds over 117.80
SLV (Silver) Sloppy daytrading but overall see this going to 18.00
GDX (Gold Miners) 25-26 should be next target if holds 21.00
USO (US Oil Fund) 10.15 support held. Over 10.80 should continue
XOP (Oil and Gas Exploration) Like this longer term if holds 30.00
TAN (Guggenheim Solar Energy) 23.00 a very good point to hold
TLT (iShares 20+ Year Treasuries) Holding the 50 DMA thus far
UUP (Dollar Bull) 24.50 support if the dollar is to hold
FXI (China Large Cap Fund) Those shooting stars’ candlesticks seem to have resolved to the downside. There’s a gap though to 33.87 that if not filled is better overall.
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