Market Spins on a Narrow Base

November 29, 2017

Mish's Daily

By Mish Schneider


The metaphor of comparing the market to a circus performance began this week with an agile performer balancing precariously on one hand, while resting on an equally precarious stack of chairs.

Yesterday, we saw the market juggle a plethora of pins.

Today, we continue with our roller-skating couple, spinning wildly on a very narrow base.

I purposely rendered the photo cartoonish. After all, one definition of a cartoon is “a non-realistic or semi-realistic artistic style of drawing”.

The market has mainly thrived in what many believe to be not only non-realistic, but downright surreal.

Several instruments that have spun madly on a narrow base have had the support of a centered strong-arm to hold on to.

Today, that centered strong armed man let go of his partner.

That caused his partner to spin right off the stage and crash into several of the audience members.

Interestingly, you will not see that reflected in the Dow Jones Industrial Average as that index closed green.

Nor, will you see it reflected in my “go to” Transportation sector, which gained over 3%.

The correct term for the last 2 days of market action is “Rotation”.

However, what happens when skaters fall from one narrow base only to pick up their perilous spin on yet another similarly narrow base?

Sister Semiconductors (SMH) and the tech space is a clear example of centrifugal force run amok!

This week, in the ETF comment section I wrote, “If cannot fill gap to 105.11 could see correction to 101.”

The significance of this statement has a few levels.

First level-the gap fill I refer to relates to the reversal pattern SMH left on November 27th.

Second level-when reversal gaps do not get filled within a couple of days, low volume or not, that is a direct warning sign that the narrow space got too crowded and skaters (or weaker longs) will fall.

Third level-although I wrote 101 as support, the centrifugal force of too many longs spinning wildly on a narrow base can and often does result in the instrument blowing through support levels.

SMH found support on the 50 DMA or around 98.85.

That could turn out as a near-term low. Yet, unless we see new roller-skating couples jump on stage, a further drop to 96.40-or the exponential moving average is likely.

Now, just like a 3-ring circus, the SMH act went dark while lights went up on Financials, Retail and Transportation. The rotational spin.

History does and will repeat itself.

The lessons here are:

One-enter and exit a trade at inflection points and always have sell stops and layered targets in place.

Two-if you find yourself dizzying from a huge move up or down, look around. The base is probably crowded and getting smaller. Your goal is to be the first one on the base, and never the last one off.

S&P 500 (SPY) I would not call a .06% decline cataclysmic. 259.75 the 10-DMA in focus

Russell 2000 (IWM) It’s been nearly $10.00 of gain since the nadir low 144.50. Just sayin’

Dow (DIA) Possible runaway gap-unless it breaks under 238.44

Nasdaq (QQQ) Unless this gets back over 154, could see 149 area next

KRE (Regional Banks) Prodigal son still lavish with new all-time highs-you know what that means-take profits before he goes through all your money.

SMH (Semiconductors) 98.85 the 50 DMA with 100 pivotal resistance

IYT (Transportation) Opened above the 50-DMA and took off to new all-time highs.

IBB (Biotechnology) 308 near-term support. 315 pivotal

XRT (Retail) Tested the 200 daily moving average. It could plow higher but I’m thinking at 46.00 that’s it. Now has to hold 42.65

GLD (Gold Trust) Holding key support thus far-still like the buy volatility trade

SLV (Silver) 15.42 last swing low-back over 16.05 would be healthy

GDX (Gold Miners) Gave back the gains which means, 22.00 is now the support to hold

USO (US Oil Fund) An exhaustion gap if this cannot clear 11.70. Then, could see 10.96

TAN (Solar Energy) Good example of an exhaustion gap not filled forcing weak longs to sell

TLT (iShares 20+ Year Treasuries) Held the 50-DMA so still in play unless we get 2 days closed below 125.20

UUP (Dollar Bull) 24.40 resistance 23.98 some support

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