October 20, 2016
By Mish Schneider
Artist: James P. Mulligan
Do you feel like that Aspen tree, trying to establish roots as either a bull or a bear?
Not so easy when choked by opposing forces competing for the same earth.
Newton’s third law states that “For every action there is an equal and opposite reaction.” In most cases, that law applies to objects where one object exerts more force than the other object therefore causing acceleration of the more forceful object.
However, in the case of the stock market, the two objects-or the bulls and the bears-are canceling each other out.
To illustrate, pretend that the bulls are a book and the bears are the desk the book is resting on. Since neither has more force than the other, neither the book nor the desk will accelerate-equal and opposite reactions.
What then, are the equal and opposing forces that have prevented the market from accelerating either to the up or downside?
The market has seen impressive acceleration from the FANG stocks. Although Amazon has corrected somewhat ahead of earnings, Netflix rockets on and Google and Facebook have paused near their highs.
Newton’s third law here, like a horse hitched to a cart-equal and opposing forces-proves that FANG stocks are the horse and the Modern Family is the cart.
So how fast can our accelerating horse make the cart move? Or will the cart filled with heavy baggage force the horse to a halt?
The Russell 2000 is a heavy bag. Although holding 120 support, it has not gathered momentum.
Transportation sits in the cart filled with cardboard-heavy but not too bad.
Retail fills the cart with a block of cement.
Biotechnology is a bag bursting with sand. Bulls are hoping someone pokes a hole in the bag big enough to lighten the load.
Regional Banks and Semiconductors stay with their Family in the cart. To date though, they weigh only slightly more than the horse’s bridle and saddle do. Thereby, they minimize any major impact to the horse’s acceleration.
The market will eventually decide who yields the greater force-the bulls or the bears. Meanwhile, other equal and opposing forces to watch:
Commodites and the stronger Dollar. Metals and the talk of rising Interest Rates. Fossil Fuel and Alternative Energy.
“I can calculate the motion of heavenly bodies, but not the madness of people.” Isaac Newton
S&P 500 (SPY): 214 pivotal 216 resistance 212 support
Russell 2000 (IWM) 120 pivotal with 122 good place to clear/close above
Dow (DIA) 180 do or die support area and 182.50 resistance to clear
Nasdaq (QQQ) 117.40 pivotal 50 DMA
KRE (Regional Banks) 42.10 underlying support. 43.50 resistance
SMH (Semiconductors) Has to clear back over the fast moving average at 68.40 and hold 66.70
IYT (Transportation) Now 2 inside days-one to watch for a break either way
IBB (Biotechnology) 264 key weekly moving average
XRT (Retail) Inside day under the 200 DMA
IYR (Real Estate) 78.00 pivotal
GLD (Gold Trust) support at 120.50. If breaks, see more downside
SLV (Silver) 16.40 support
GDX (Gold Miners) Should now hold around 24.50 and clear 25.10
USO (US Oil Fund). 11.50 pivotal. 10.80 major support
TLT (iShares 20+ Year Treasuries) Could be a bear flag forming.