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Mish's Daily: More downside coming

August 27, 2015

By Mish Schneider

Note: Tonight’s evening watch was written by Jonathan Griffin Assistant Director of trading education and research.

Will the rally hold? And if it does, just how far will it go?

As anticipated, the inside day patterns in the SPY and DIA on Wednesday played out to the upside on Thursday. The gap higher, and early morning retracement even provided an opportunity for the nimble trader to catch a nice opening range reversal trade like the one’s Geoff’s been discussing the recent Trades & Tutorials posts.

Now we are left with the question of whether this is a short term bounce or a resumption of the longer term bull trend?

With large amounts of overhead resistance in almost every major sector and group throughout the markets a continuation of the bull trend seems less likely.

Since the four major indices are in bearish and distribution phases, and thus need to complete the cycle of phases, I lean more toward the possibility of more downside action to come.

Why more downside?

If we take a closer look at the recent action we will note that, even with the bounce since Monday, there haven’t been very many great new bottoming patterns.

There are several reversal patterns that we like to look for…

An example of a one day pattern indicating that a bottom may be in place is a new sixty day low with a wide range and double its average volume. This day should also close in the top twenty five percent of its range.

If a wide range, big volume, 60-day low occurs but does not close in the top of its range, then a bottom pattern requires the second day to confirm by closing over the high of the new sixty day low.

Another flavor of this type of bottom is when the second day is an inside day, In this case, the third day must provide the final confirmation by closing over the high of the day it put in the new sixty day low.

So how do the indices fair in this way?

The S&P 500 (SPY) is the only index to have a confirmed reversal pattern and that is largely due to the two inside days. And thus a close on Thursday over the high from Monday.

The Russell 2000 (IWM) had the inside day on Tuesday but never gave confirmation on Wednesday so no pattern here, just chop.

The Dow (DIA) would have needed an inside day or a close over Monday’s high on Tuesday, which it did not get so again no pattern.

Lastly that leaves the Nasdaq (QQQ) who similarly to the Dow would have needed the inside day or a much better close on Tuesday to confirm.

So with three out of four indices just making noise this looks more and more like the dead cat bounce before another new low.

S&P 500 (SPY) Strong move to resistance at the ten DMA at 105.76

Russell 2000 (IWM) Failed to close over Mondays high, with resistance now between 116.07 and 116.86.

Dow (DIA) A nice move up from the inside day. Needs to hold163.68 and clear 167.83.

Nasdaq (QQQ) Needs to clear and close over 106.88 if this move is to keep going.

Volatility Index (VIX) Flipped back into an unconfirmed accumulation phase. Playing jump rope with the 200 DMA at 24.41.

XLF (Financials) Also a nice move after the inside day. However until this clears 23.95 I’m not impressed.

KRE (Regional Banks) closed over Monday’s high by one cent. More interesting was that it cleared the weekly resistance at 40.49.

SMH (Semiconductors) Like this back over the 10 DMA but we still need to see it clear monthly resistance at 49.79.

IYT (Transportation) Cleared 140.26 so getting back on track. Next needs to clear 143.63.

IBB (Biotechnology) Looks much better now that it’s back over the 200 DMA at 343.29.

XRT (Retail) Tested monthly resistance at 93.39 but failed to clear.

IYR (Real Estate) Seems weak unless it can clear back over first 72.14 and then 73.00

XHB (US HomeBuilders) Confirmed phase change to warning. Now needs to clear 36.47.

GLD (Gold Trust) Inside day with strong resistance at 108.63

SLV (Silver) Trying to bounce back. Really want to see this back over 14.00.

GDX (Gold Miners) Nice bounce form support at 13.00.

USO (US Oil Fund) Up 9.71% from the open. However we need more confirmation of a bottom before jumping in!

OIH (Oil Services) Needs to hold over 29.05 for this to be any good.

XLE (Energy) Resistance at 64.96.

XOP (Oil and Gas Exploration) Tested the 10 DMA but couldn’t clear

UNG (US NatGas Fund) 12.28 the 2015 low to hold

TAN (Guggenheim Solar Energy) Looking better and better. Needs to clear 30.25and then 30.96.

TLT (iShares 20+ Year Treasuries) Inside day and still holding support at 121.77.

UUP (Dollar Bull) Cleared the 200 DMA so now back in an unconfirmed warning phase.

EEM (Emerging Markets) Needs to hold 33.63.

IFN (India Fund) Inside day.

EWI (Italy) Confirmed phase change to warning.

RSX (Russia) This liked the move in oil! Closed up 8.08%.