Which way will the market fly with a monkey on its back?

January 25, 2016

Mish's Daily

By Mish Schneider

“Straighten Up and Fly Right!”

I can’t think of any song title more perfect to describe the current sentiment of investors. Furthermore, the first line of the song (written by Nat King Cole) is:

“The buzzard took a monkey for a ride in the air.”

Hello! The Year of the Monkey is nearly upon us. In the song, the monkey (market) is flying with the buzzard (selloff). When the buzzard tries to throw the monkey off its back, the monkey grabs his neck and says, “now listen Jack.”

Looking just at China, Interest Rates and Oil, Monday’s session saw declines in all. The China ETF (FXI) no longer has a possible island bottom. However, 30.00 could be a pivotal support area if holds.

TLTs, the Interest Rate ETF rose yet could not clear the top of the topping candle it formed last week at 127.92.

The Oil ETF (USO), broke the January 10-Day Calendar Range low at 8.64. A quick recapture Tuesday, then still a shot to see buyers. After that, 7.92 recent lows it must defend.

If the monkey gains control of the buzzard, can the market still rally from here?

Let’s look at what our Modern Family, (IWM, XRT, KRE, IBB, SMH, IYT), is telling us.

We want to see the Russell’s, hold 97.51. They still have the potential to see 110 which makes the risk/reward ratio just under 2:1 for a swing.

As far as the rest of the family members, in best shape is Semiconductors (SMH). The worst shape award goes to our Prodigal Son Regional Banks (KRE).

Semis are holding the reversal pattern, January 10-day Calendar Range low, the fast moving average and percentagewise, declined the least amount. 46.14 is our rock bottom support number.

Regional Banks broke the JCRL and August low. It never even came close to having either a reversal pattern or clearing the fast moving average. Only a move back over 35.81 can save it now.

Once again, we see confirmation that a family that stays together tells us direction with the clarity of a high performance navigation system. Division among the family, and the path becomes muddy.

“Straighten Up and Fly Right” was based on a black folk tale that Nat King Cole's father used for a Church sermon. In the tale, a buzzard takes different animals for a joy ride. When he gets hungry, he throws them off on a dive and eats them for dinner.

When a monkey, who had observed this trick, goes for a ride, he wraps his tail around the buzzard's neck and gives the buzzard a big surprise by nearly choking him to death.

Therefore, if the family’s distant relatives (FXI, TLTs, USO) can “straighten up and fly right”, seems logical to gather that the monkey (market) will “choke that buzzard” (sell off) and be back on its way to a rally.

S&P 500 (SPY) 185.52 the JCRL to hold. Back over 190 new life

Russell 2000 (IWM) 97.51 the JCRL to hold. These levels are super important as if they break, expect more selling. Over 101 new life

Dow (DIA) Needs to hold 158.23. Over 161 much better

Nasdaq (QQQ) Remains in best shape with lots of earnings coming out. 99.51 key support pretty far away.

Volatility Index (VIX) If clears 27.64, clears the 10-day January Calendar Range high!

XLF (Financials) Broke 21.13 the JCRL. Not much to say about recent lows so now looking at 18.52 form August

KRE (Regional Banks) 31.05 major monthly support

SMH (Semiconductors) 47.60 started the party so logically it could retrace to there, but must hold.

IYT (Transportation) Like to see this hold 117.67 and clear 121.15

IBB (Biotechnology) 273.47 is the JCRL. 290 clearance could be a game changer.

XRT (Retail). 38.65 is all I would risk to if looking for support

IYR (Real Estate) 70.00 support