When The Markets Hand You A Lemon, Make...

May 21, 2017

Mish's Daily

By Geoff Bysshe


blankOn Wednesday the stock market handed most traders and investors a lemon in the form of a news event that caused a big drop.

Lesson #1 from market catalysts that you can’t control, is to focus on what you can control and make the correct trading decisions based on where your positions are, not where you had expected them to be. Perhaps we’ll cover how to do that another time.

The second reaction to a big market move (especially a down one in a bull market which is likely to be catching a lot of traders by surprise) should be to take that lemon and make it into lemonade.

Here’s how.

Any time a bull trend is hit with a big range down day it is a test of the strength of the trend, and it creates great risk levels to trade off of which is another way of saying – an opportunity.

The opportunities come in several forms:

  1. Market ‘shocks’ can highlight which areas or sectors of the market are strong, weakening, strengthening, or very weak. If you have special indicators like our Triple Play or Real Motion you can quickly see how stocks and ETFs underlying trends either strengthen or weaken during these shocks and home in on the best ones and most dangerous ones quickly, but…

    If you don’t have special tools you can still observe which areas of the market were hit the hardest vs. those that fared better. To do this look at which areas of the market held support levels vs. those that didn’t. AND…

  2. The ‘shock or lemon’ day is just the beginning. The best opportunities come in the coming days and even weeks as you determine which areas of the market have shifted and which just handed you an opportunity to by the dip!

The range of the ‘lemon’ day is your guide.

You’ll see in the comments about the ETFs below that several times I reference Wednesday’s range. I’m really looking at it for EVERY stock and ETF I look at and own, but saying that in every comment would get monotonous!

So if you’re still reading this commentary you should read the comments below knowing that you should also be looking at the range of Wednesday for every symbol even if I did not mention it.

And the analysis is simple.

Below the range is bearish. Above the range is bullish.

From there you still need to consider the bigger picture, but let’s look at the extremes to illustrate….

SMH is the strongest sector. If it had continued to break below the Wednesday low this would have suggested the bulls where not still raging in the markets leading sector, and it may be time for a selloff. If it can’t recover over Wednesday’s high (see notes below) that too will be a warning.

XRT has been one of the weakest groups and it continues to fall. It’s not washed out yet. So don’t look of a bottom.

IYR, however, is now on the watch list as a trade for premium members because 1) it didn’t sell off on Wednesday, and  2) it recovered over Wednesday’s high quickly.

Unfortunately, the implications of IYR being an area of the market that may have shifted to the bullish side are not bullish for the market. More on that in the future.

In short, Wednesday’s range tells you where to focus and it which direction!

S&P 500 (SPY) Classic looking double top.  The only one of the stock index ETFs to break over the high of Wednesday. Expect resistance from 239.60-240. Support around 237.70, and 236.50 before you get to the weekly low of 235.40 If that breaks watch out below with support at 233.50 and then 225.

Russell 2000 (IWM) 137 is pivotal. Will the 6-month calendar range low hold at 133.60? Close above 138 would put things in a positive perspective

Dow (DIA) Closed marginally over 50 DMA. Needs to get over 209 to get started up, and even still that’s in resistance. 206.50 may offer support. 205.85 is the weekly low 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) Leader of the pack but still needs to reclaim 10 DMA at 138.10. Important support at 135.80 and if broken look for next support at 133.70

KRE (Regional Banks) Needs to clear 53.25 to move up, but lots of overhead at 54-55. The big support to hold is 51.50 as it looks heavy. Big support at 46.50.

SMH (Semiconductors) Leader of the pack, impressive recovery – note Friday’s high equals Wednesday’s high. May find support at 83, but needs to hold 81.44. If it can’t, next support at 79.60.

IYT (Transportation) Needs to break over 162 to start higher, 200 DMA just below this weeks low at 157.40. This area needs to hold or it will look like this key sector is ready to lead the market lower.

IBB (Biotechnology) Had a weak day.  Stuck in a range of 295-288. Big support and 200 DMA at 285-284.

XRT (Retail) Yikes… this sector is hanging on for dear life at pre- election levels… needs a flush and reversal pattern to think about any long play. Or a move above 43.  Long term pattern on weekly pattern looks heavy with support at 38 at 80 month moving average.

IYR (Real Estate) On of the strongest sectors relative to Wednesday’s range. Still Stuck between 77 and 79 and can follow break-out either way with tight stops

GLD (Gold Trust) Needs to get over 120 to look good and confirm phase change. Breakdown under low at 118.50 could mean a lot more pressure to downside to follow.

SLV (Silver) Under pressure and murky. Avoid for now and prefer to buy on meaningful strength

GDX (Gold Miners) wait for a break over the 200 DMA and 6-month calendar range of 23.90 to get long.

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