September 2, 2017
Mish's Daily
By Geoff Bysshe
I spent the week writing here about the transition from a market where the bulls moved from being on brink of despair, clinging to their major moving averages, to now hitting all-time highs.
Furthermore, the market dismissed the North Korean missile over Japan on Tuesday, as if it knew that Wednesday would bring the strongest quarterly year over year GDP number in two years.
How do these reversals happen, seemingly out of nowhere, and even before news that justifies them?
Sometimes news will surprise the market, but most of the time it gets ‘baked in’ (term used to describe that the market has already reacted to the news) over time as big players buy or sell based on their anticipation of whether the upcoming news will be more or less positive than the market is expecting.
This is exemplified by stocks that announce strong earnings, yet collapse in price because the announced earnings are lower than the market expected.
Just because news is usually baked in before it hits, it doesn’t mean it’s useless. In fact, it’s very powerful when used properly!
The market moves before the news.
More importantly, the market’s move that enables you to anticipate its next major direction may NOT be in the direction of it next major move! (you may want to read that sentence again)
This is what happened last week in several area that were pointed out along the way. And if you’ve been reading the comments on key ETFs below, there have been more examples there. For example, XRT, USO, UNG, and UUP.
Here’s why.
Markets tend to have the best moves as the general consensus of participants become more bullish or bearish, and then they act on it. In other words, market participants need to change their market opinion for markets to move!
So unless the news can change a lot of market participant’s opinion, it’s not going to move the market in a sustainable direction.
Here’s how it worked last week.
The market participants that feared the effect of escalating geopolitical tensions with North Korea had weeks of bad news to prompt them to sell and drive market prices down. Of course there were other potential reasons for the market decline, but to make the point I’ll focus on this one.
On Tuesday, when the most aggressive missile launch to date was fired markets reacted very bearishly as you would expect.
However, if you were watching the market overnight you would have seen that by the time the market opened for regular trading on Tuesday it was already recovering from much steeper declines.
That lower open proved to be, for the savvy trader, the end of the selling for people concerned about the situation in North Korea.
If there’s no one left to sell the news… There’s only one way the opinion of market participant can shift, more bullish and that ends the trend and potentially starts a new one.
For example, the trader waiting for a pullback who is not as concerned with North Korea, or believes the economic news will be good later in the week, etc. now has a reason to become more bullish.
Adding fuel to the bulls’ fire… Savvy traders who understand this is how markets bottom, will also become more bullish as prices react positively, and…
Then North Korean bears start to see their bearish opinion is wrong, so they become less bearish.
We all know how fickle humans are when it comes to fear and greed. It’s not hard to shift our actions.
So what about Wednesday’s good GDP news?
It’s best to view news as the potential catalyst that will fuel or exhaust the market’s trend in sentiment. Since this news hit right after a shift in sentiment it provide fuel to continue the bullish move.
So if you want to know what’s coming next, listen to the ‘message of the market’ which is how the market reacts to the news. Don’t listen to the media justification for why the news made the market act the way it did.
Unless of course, the media gets it right. To their credit, many sources do.
S&P 500 (SPY) Tried to break up, but paused. Look for support at 247.50, 245.60-.50, then 244.60. Needs to close well over 248 to get going, and watch the all-time high of 248.91.
Russell 2000 (IWM) Steadily up all day through the 50-DMA, and key 139 level. Support at 140.00, 139.00, 137.80 and then 137.25 and 136.25. Resistance at 141 and 142.30.
Dow (DIA). Muted rally. Stuck at the big resistance is at 220.
Nasdaq (QQQ) Media loves its new high, but it’s just a consolidation day. Look for support around 144, 143 and 142. Resistance is at today’s high, 144.90-145.00 and 145.50,
KRE (Regional Banks) Look for a close over 53 to indicate the 51 low is real. 54.00 is major resistance.
SMH (Semiconductors) Approached all-time highs, but couldn’t break them. Look for support at 88-87.60.
IYT (Transportation) Stalled at the 50-DMA. Look for support at 167.50 and resistance at 170.
IBB (Biotechnology) Another strong day. Look for support around 330-328.80
XRT (Retail) The suspected bottom is gaining momentum. The 39-38.40 area should now be a floor of support. Big resistance still at 40, but I expect it to be broken if the general market remains bullish.
IYR (Real Estate) Look for support at 81 and a breakout over 81.60.
XLU (Utilities) First significant close under the 10-DMA since July 11th! Support at 54.40 and 53.60.
GLD (Gold Trust) It continued to hold up well. Support is 124 and resistance at 128
GDX (Gold Miners) Look for support at 23.90 and 23.50 Expect resistance at 25.60
SLV (Silver) Look for support at 16.30-.20. 16.80 is the next level to break.
USO (US Oil Fund) Following the pattern of a head fake low to form a major bottom. Look for a close over 9.75 to kick off a nice rally. Support at 9.50 and must hold 9.30. Big resistance at 10 an 10.25.
UNG (Natural Gas) We got the O.R. breakout over 9.75 that I’ve been talking about for over a week. I’m long. Here’s what has been written here for weeks… “Still in a bear trend according to phases. If it has a 30-min Opening Range breakout over 6.75 it could indicate a multi-week bottom. The all-time low is 5.78, the weekly base high is 9.80. So the risk is just over a $1 and the first target is just over $2, but if it breaks $10 then $12 is the next stop.”
KOL (Coal) Accelerating higher. Look for support at 14.90-.80.
TAN (Solar Energy) 22.00 resistance and 21.00 support. That’s all you should focus on.
TLT (iShares 20+ Year Treasuries) Ugly day. Interesting close over the “Should not break 126.70 level”. Friday’s low is now pivotal for the bull move that began in early July. Expect big resistance at 127.30.
UUP (Dollar Bull) Multi-year breakdown, may have just reversed. Look at your weekly charts for any close over a prior week’s high that is over 24.20. 23.90 – 24.00 should be support.
FXI (China) Consolidating nicely. If it can hold over 43.40, the long-term picture is beginning to look like an accelerating breakout. Support at 43.40 and 42.75. Next resistance is 46 - 46.50
EWW (Mexico) Consolidating between 56-58. If it closes over 57.75 it could run higher for a while. It should hold 56.80 and then 56.
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