Trading Inside and Outside a Bubble

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Art by JR Lancaster Photo by Mish

Over the weekend I showcased another art installation by the same artist to compare pink flamingos on a wood pile and the varying interpretations of the market. Are the birds procreating and nesting? Will the offspring hatch or might there be a hungry bear nearby to feed on the chicks?

Similarly, is the market gathering steam to finally clear 18,000 in the Dow or is this the last gasp before the Brexit storm of selling hits?

The head in the woodpile represents a younger, more risk-tolerant version of our now Granddad Russell 2000. After all, IWM has stuck his head in the middle of this rally making himself the anointed leader.

With now both the Dow and S&P 500 joining IWM into unconfirmed bullish phases perhaps we can not only see and clear 18K but also watch NASDAQ 100 move back over the 200 daily moving average.

Or, perhaps that same hungry bear waiting around by the woodpile holding a can of gasoline and a cigarette lighter and salivating over the thought of eating a bunch of barbequed birds, also has his eye on the Russell’s?

Dunno. We have two paths to choose from-the path of trading in a bubble and the path of waiting for the news.

What is trading in a bubble?

Ignoring all tweets, news, polls, opinions and fundamental analysis. Instead, opting for a myopic view of charts and price action only.

Trading in a bubble works a lot of the time until it doesn’t. I for one, like the bubble a whole lot more when the entire Modern Family trades in the bubble with me.

Presently, with a divided Family of vital US economic sectors (Retail and Biotechnology Bearish while Semiconductors and Small Caps are Bullish), that is far from the case.

Then there’s Regional Banks and Transportation. Stronger than Retail and Biotech, they nonetheless are trading in Distribution phases or under the 200 daily moving averages. And if you are new to the trading life, that means that many institutional buyers have already bailed as most watch the 200 DMA carefully.

Even the 2016 reliable commodities are mixed. The metals and many agricultruals are in bullish phases. However, if the US dollar and short-term interest rates rise, commodities-a very crowded space filled with weak longs-can take a hit. But that’s me talking out of the bubble.

In the bubble, I see a normal occurrence of profit taking rather than a top in commodities.

I know, it’s a tough choice-bubble or no bubble. Here’s what I’ve done:

Existing swing positions (not referring to daytrading)-some old and some newer-have stops to exit in place. Most are at no risk of losing from our original entries. However, if stopped out, we would be giving up a significant percentage of gains.

Nevertheless, I’m willing to take that risk as a way of trading both inside and outside the bubble. What I have not been able to reconcile this week, is taking on more risk until the week works itself out.

And that my friends, is precisely why this bubble feels more to me like a head in a woodpile.

S&P 500 (SPY) Unconfirmed bullish phase. 207.95 is the 50 DMA and pivotal. With more weakness expect to see 202.50. Over 211, way better

Russell 2000 (IWM) 113 level important. 115 pivotal. If gets over 116.50 impressive

Dow (DIA) Unconfirmed bull phase. Needs another close over 177.86 the 50 DMA to confirm

Nasdaq (QQQ) Over 108.50 will prove renewed strength. Otherwise, 106.35 level has to hold up

XLF (Financials) 22.40 support and 23.25 resistance. The range for now

KRE (Regional Banks) Interesting that this had a Golden Cross today even though the price is below. If good must clear 40.10

SMH (Semiconductors) Inside day. The best looking of the family. By far.

IYT (Transportation) As wildcard hard to predict. Can go either way

IBB (Biotechnology) Close to a $40 breakdown under 250. A miracle would be a move back over 270

XRT (Retail) If can get back over 41.75-42.00 better.

IYR (Real Estate) Maybe confirmed a top. I’m guessing that has a lot to do with the rest of the market now

ITB (US Home Construction) Bullish so yeah, keep on radar

GLD (Gold Trust) Back near the 50 DMA-we shall see

SLV (Silver) 15.75 support with overhead at 17.00

GDX (Gold Miners) 24.11 the 50 DMA

USO (US Oil Fund) Not out of the woods though until we get a weekly close over 12.15

OIH (Oil Services) Looks like its building up for more upside

UNG (US NatGas Fund) 8.35 the 200 DMA

TAN (Guggenheim Solar Energy) I want to like this but patience has been a friend

UUP (Dollar Bull) 24.20 support