July 12, 2016
Mish's Daily
By Mish Schneider
The word “cake” and all it implies comes up a lot for me lately.
The market rewards corporate profits and investors by letting them “have their cake and eat it too.”
We see the 21st century version of people revolting with a familiar anger inspired by the 18th century expression “Let them eat cake.”
Was the gap lower on Tuesday in the TLT a technical or even prophetic piece of “cake?”
Monday night’s Daily asked what would you do if you were the Federal Reserve right now? With rising commodity prices, a firming dollar and new all-time highs in the Dow-are rates too cheap?
Furthermore, we saw that technically Monday’s price action in the bonds had the potential for a make or break day on Tuesday. With the TLT gapping lower by over 1% on the open and then continuing to decline throughout the day, was the question “What does a technical trend reversal look like?” auspiciously timely?
3 of the 5 Classic Signs Apply
What is an island top? Quite literally an island, it is when we see a gap higher to new highs, and then within one to several days of consolidation at those highs, we see a gap lower leaving the price action alone in space.
Also known as an exhaustion gap, the pattern is considered quite rare. Looking at volume, islands characteristically have a notable increase on both the gap up and the gap down.
In the TLT on the gap up day July 5th, the volume was slightly better than average. Today’s gap lower brought in better than average daily volume. I like to see a second day confirmation that the gap will not get filled.
Meanwhile, a blow off top “signals the activity of the most irrational and overly exuberant market participants, who, wanting to take part in the rally, momentarily push up the already-overvalued stock.” Investopedia Last week, call buyers came in with abandon scooping up 142-143 calls. Articles appeared that rates were not likely to rise until 2018.
The 3rd Classic sign obviously occurred with the new high, close near the intraday lows and a confirmation today.
With 3 out of 5 textbook signs that the TLT is done, what does that mean for the market and those filled with the cake they’ve been feasting on post Brexit?
If the TLT confirms, then we must look for the market to behave similarly. Focusing on the Dow (DIA), the all-time high in 2015 was 183.35. Although today it climbed to 183.62 intraday, it closed right around the old 2015 high.
Double top or criteria 4 in the classic signs? Perhaps. Blow off? Well not really enough volume. Exhaustion gap? Stay tuned. The point is if the TLT has a top, so do other sectors of the market.
Naturally watch the Modern Family sectors, particularly the Financial or banking stocks. Biotechnology is key as well.
Finally, given the recent tragic events both in the US and abroad, let’s not lose sight of the unsettling mood. Not one to foster fear, I admit I feel concern that we have not seen any exhaustion gap in violence.
If indeed the Fed changes policy and the glue that has held the market together dries out, think about “cake” and all that it implies.
S&P 500 (SPY) Made a new all-time high. 212.50 next support level.
Russell 2000 (IWM) 118.64 the 2016 high now support to watch.
Dow (DIA) 183.35 the all-time high closed just above. Best support 181.78 the runaway gap low
Nasdaq (QQQ) Took out and then closed right at the 2016 high 111.44. 108.50 the next underlying support
XLF (Financials) 23.60 substantial resistance with 23.20 first line of support then 23.05
KRE (Regional Banks) 38.75 support to hold. 39.85 the 200 DMA and big resistance
SMH (Semiconductors) 60.13 all-time high. 57.80 area support
IYT (Transportation) 137.80 underlying and key support with quite a distance to the 2016 highs to go. If fails from here, note the lower highs since last March
IBB (Biotechnology) Narrow range, low volume-not sure if running out of steam or resting
XRT (Retail) Gotta give it to Granny. 43.39 support and thinking she’s tired
IYR (Real Estate) Still looks good
GLD (Gold Trust) Good. Shaking out the weaker longs.
SLV (Silver) 19.33 the 200 WMA which matters most at the end of the week.
GDX (Gold Miners) 28.44 support or the low of the runaway gap day
USO (US Oil Fund) Meaningless until it changes the 2-year trend down
OIH (Oil Services) This was a good place to buy with USO rally. Hope you did.
UNG (US NatGas Fund) Watching over today’s highs
TAN (Guggenheim Solar Energy) 21.40 support
TLT (iShares 20+ Year Treasuries) 141.07 resistance and if an island top, wont fill the gap to 141.70. Do note though 138 the runaway gap low
UUP (Dollar Bull) 25.07 the 200 DMA resistance. 24.70 support
FXI (China Large Cap Fund) Cleared 34.60 the 50 week moving average if holds
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