Trend Traders Get Ready!

May 31, 2017

Mish's Daily

By Geoff Bysshe


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Yesterday my conclusion was that the market was nervous.

Today was a good example of how sometimes the market needs to go up to come down.

The indexes opened higher, but as soon as they began to experience profit taking, the slide turned into a early morning rout! That’s what happens when a market is nervous.

Financials were especially hard hit, but they also did not open higher so right from the start they were at a disadvantage.

As you might have expected the stronger area of the market QQQ and SMH, held up better then the SPY, which was stronger than the IWM. So the underlying relative strengths are still the same.

By the end of the day the daily charts had what candle chart readers call “long wicks”. At lows these can represent bottoming patterns, but at highs they can warn of tops.

With the SPY near its high and the IWM near a range low and both have the same big lower wick pattern – who should we believe!

In both cases (highs or lows), the key to reading volatile days like today with big wicks, is to see how the market reacts the next day. Today’s range could prove to be a pivotal range.

I wouldn’t be surprised to see a trend day tomorrow. If the market trades over or under today’s range I’ll expect it to continue in that direction.

Why?

The market is still nervous so a second day down could bring out the profit takers again, but if it heads higher the bulls nerves will be calmed and once again the fear that today’s pullback (if I can call it that) was yet another one that the bulls will chase higher.

Note as I pointed out to watch yesterday, the QQQ was not able to close below its prior day low.

S&P 500 (SPY) Overhead resistance at 242.08, the high from last Thursday kept market in check. Support at 240.70 area held .... next level of support at 240, then 236.50 before you get to the weekly low of 235.40 If that breaks watch out below with light support at 233.50 and then 225.

Russell 2000 (IWM) sloppy action and weak relative performance again and now into confirmed warning phase. Nice trendline from weekly highs would reverse downtrend and warning phase at 137.50. Much more below these levels could drag rest of market down with support a 200 DMA at 131.65.

Dow (DIA) Decent recovery on daily candle chart but still closed lower after gap up, so it is suspect. A close over ATH at 211 would confirm upside.209 is support at 10DMA.  205.85 is still the weekly support and if that breaks then it should find support around 204. If it breaks 204 the next support level is 194 on monthly charts

NASDAQ (QQQ) Gap up to yet another all -time high but iffy close with red candle. Gap up failure. pattern barely intact. with Important support at 139.40 and 10 DMA.  If broken look for next support at 134.75

KRE (Regional Banks) Weak again and poor momentum but held test today of 200 DMA. There’s a lot of resistance at 54-55. The big support to hold is 50.90 at 200 DMA. head and shoulders top forming

SMH (Semiconductors). Made yet another new high on big gap up and held at unchanged. For day or mini-swing buy on weakness above S2 around 85 with tight stops at 84.40 at 10 DMA

IYT (Transportation) Still on Pause sitting just under 6-month calendar range at 166.10 which is breakout level.  Needs to hold 163.30 for short term traders and 158 for swing to position trades where 200 DMA resides.

IBB (Biotechnology) Sitting just below 6-month calendar range but above 200-day MA and 200-week MA. Closed well compared to other sectors but stuck in the middle of two key points mentioned here

XRT (Retail) retail stocks remain under pressure but today’s action was positive with strong close after flush today that tested recent lows. Move above R2 at 41.30 could be what doctor ordered for recovery. Needs to hold above 40 and close above 40.35 to stay intact

IYR (Real Estate) Sloppy action caught in crosstown traffic sitting on 50 DMA but hanging onto bull phase

XLU: This risk off indicator outperformed SPY yet again. Important support at 52.20 with near term support at 53.30. This is one of the intermarket relationships that are of concern with current leg up in equities

GLD (Gold Trust) Nice pop on selloff of equities. Sloppy close but still in bull mode. Divergent slopes of 50 and 200-day MA are giving mixed message Should find support at 119.40. Breakdown and close under low at 118.50 could mean a lot more pressure to downside to follow.

SLV (Silver) Breakout above 1 and 6-month calendar range highs barely holding A move above 16.55 should lead to a nice pop and clearing 16.75-80 would clear 200 DMA and bode well for further even bigger gains

GDX (Gold Miners) Quiet tight range and still waiting for a break over the 200 DMA and 6-month calendar range of 23.60 to get long. A break below 21 could get ugly to downside

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