February 16, 2016
Mish's Daily
By Mish Schneider
Momentum is the Next Day’s Starting Pitcher -Earl Weaver
Moving from Einstein and the Theory of the Russell 2000’s Theory of Relativity, let’s now look at Sir Isaac Newton and his Laws of Momentum.
In classical mechanics, momentum is the product of mass and velocity of an object. (Mass in motion).
If, according to Einstein, space and time are interwoven and dynamic, Newton said that the symmetry of space and time is in its linear momentum.
The linear momentum in the market this year has been for a move lower. What stops momentum is a greater amount of force applied for a longer period of time until the velocity changes. Hence, the momentum is changed.
Like everything else in the market, we can measure the changes in momentum on a day, mini or position swing timeframe.
On February 4th, I saw and wrote about the change in momentum in the Transportation sector. “Most interesting of the Family is Transportation (IYT). Not only did Trannies lead the market, it left the Bulls hopeful that as the weakest sector of the family since March 2015, they could be the first one to recover.”
On February 4th, IYT closed at 126.41. February 16th, it closed at 129.32 and into an unconfirmed recovery phase.
How did I see that? Is there a way to measure momentum? If momentum shifted for IYT (and the market is now following) is that on a short or longer term timeframe?
All good questions. Answers I seek and will now share with you.
How did I know?
First, in my quoted statement above, notice I valued the longevity of its downward move therefore, based on my knowledge of phases, figured it could be the first one to rally.
Secondly, looking at the daily charts, I saw IYT hold well above the 2016 low while SPY tested its 2016 low. First clue momentum had shifted.
Is there a way to measure momentum?
Yes! I use proprietary software that compares the relative strength of any instrument with the relative strength of the SPY. I look at that on both daily and weekly timeframes.
I also look at a longer term momentum indicator that incorporates price action relative to a Moving Average and signals changes in relative momentum. I use my experience and instincts to view measureable inflection areas.
If momentum shifted for IYT (and the market is now following) is that on a short or longer term timeframe?
Interestingly, the momentum has shifted in IYT on both the long and short term momentum charts we use.
The long term chart in SPY continues to show downward momentum. The short term chart in contrast, shows a potential double bottom.
Since I have a particular penchant for the Russell 2000 (IWM), that picture continues to look quite different. Currently, both the short and long term momentum indicators point down. That means for the IWM, this could still only be a dead cat bounce.
Henceforth, my other advice on February 4th read, “If IYT clears 127.71 it must fill the gap to 128.79. If does, would begin to be a buyer of dips.”
For now, consider the words of an unknown author: “It is not of importance where we stand, but in what direction we are moving.”
S&P 500 (SPY) Low volume not that that is the only criteria. Now, we must see this hold around 187.60.
Russell 2000 (IWM) Good 3-day move off the low. Want to see this hold 97.51 the 6-month January Calendar Range low
Dow (DIA) Even worse than the IWM, this is showing downward momentum even while it has had this bounce. Call 158 rock bottom support
Nasdaq (QQQ) Maybe, if this closes the week out over 103.50 we can more conclusively call this a bottom
Volatility Index (VIX) Landed on support at 27.15 area
XLF (Financials) Confirmed the island bottom but do not see the shift on the downward momentum yet.
KRE (Regional Banks) 34.78 the fast moving average we can use to see if this rally is real
SMH (Semiconductors) Momentum indicator more neutral here. 50.00 big resistance with 47.40 minor support to hold
IYT (Transportation) 127.71 is the point to hold now. Needs a second close over the 50 DMA to confirm the phase change
IBB (Biotechnology) Impressive bounce off the 200-week MA-not sure how much we will get so instead rather say it has to hold 254 area
XRT (Retail) Looks a bit like SMH in the momentum charts. Otherwise, 40.74 is the 200 WMA and the place to hold as we continue the short week
GLD (Gold Trust) Now has a topping reversal candle-all in a day’s work. However, lots of support on the way down
SLV (Silver) 14.40 support at the 200 DMA
GDX (Gold Miners) Possible reversal candle from the highs on Friday. However, still has momentum in its favor
USO (US Oil Fund) Momentum to the downside has subsided. Now, we need to see this get back over 10.00
TAN (Guggenheim Solar Energy) Good bottoming 2-day pattern without any significant volume. I want to get excited about this but my momentum charts aren’t given it to me yet
TLT (iShares 20+ Year Treasuries) Still in bullish phase. Holding 129.68 support from February 8th.
UUP (Dollar Bull) 25.27 the overhead resistance
FXI (China Large Cap Fund) Momentum to downside slowed. Now it has to hold around 29.45
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