Russell 2000 stuck between breadth thrust and death cross

Hitching a portfolio to small cap stocks has been a sure ticket for a rollercoaster ride.

We won’t even talk about the last two years of high volatility without any net progress. Just over the past month, the Russell 2000 went from a bullish breadth thrust to a ‘death cross.’

Will the death cross over-power the breadth thrust or vice versa?

Breadth thrust

What was the breadth thrust? From September 9 – 11, the Russell 2000 rallied more than 1% on three consecutive days. When coming from a 6-month low, that has happened only five other times over the past decade (see blue bars).

As the blue bars show, the Russell 2000 rallied strongly almost immediately every time. Despite the signal’s solid track record, the September 11 Profit Radar Report noted the over-bought condition against resistance (red line) and warned that: “The setup is not ideal for a buy signal.”

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Death cross

Only 16 days after the breadth thrust, the Russell 2000 and corresponding iShares Russell 2000 ETF (IMW) suffered a death cross.

The red bars highlight every death cross over the past ten years. Although I’m not a fan of the fear-mongering death cross label, 1-2 months after each death cross the Russell 2000 traded lower every time. The last two death crosses (11/13/2018 and 9/2/2015) were particularly unkind.

Trouble shooting

Why did the breadth thrust fail?

Because the Russell 2000 could not make it above resistance. In fact, not only the Russell 2000 ran into resistance, the S&P 500 and Dow Jones Transportation Average did too.

I published this triple index resistance chart in the September 15, Profit Radar Report and warned that:

“The S&P 500, Russell 2000 and Dow Jones Transportation Average are at an inflection point. While the S&P 500 remains below purple trend line resistance, we allow seasonality and cycles to pull stocks back down.”

Conclusion

The two diametrically opposed Russell 2000 signals discussed above illustrate a much larger conflict. Over a month ago (September 1, Profit Radar Report) I found a lot of conflict among indicators.

Some breadth measures were strong, some weak, short-term cycles were up, but longer-term cycles down, etc.). Usually when that happens, the market stays range bound.

I personally would like to see lower prices, and the Russell 2000 death cross supports that conclusion. However, there are a number of sentiment readings that may limit down side in terms of size of length.

Continued updates, projections, buy/sell recommendations are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

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S&P 500 Update – Trading Range Breaks

Sunday’s (September 29) Profit Radar Report concluded that: “If 2,938 breaks, the S&P 500 may quickly drop to 2,890 and potentially 2,820.” On Tuesday the S&P closed at 2,938 and yesterday/today fell as low as 2,855.

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

This was one of the easier short-term setups, but how does this breakdown fit into the bigger picture?

Bigger Picture

The September 15 Profit Radar Report featured the chart below, which showed that S&P 500, Russell 2000 and Dow Jones Transportation Average were at key resistance.

One major financial news website declined to publish the chart and story because “it doesn’t say much.” I politely disagreed, because the message – although not sensational – was profoundly simple and important:

Don’t buy stocks while three major indexes are below resistance and still have to prove themselves. Or, as the September 15 Profit Radar Report put it:

“While below 3,045, we allow seasonality and cycles to pull stocks back down. A move below 2,945 is needed for lower targets though.”

Down-turn Confirmed?

Does the drop below 2,945 confirm a new down-turn?

We are getting close, but as mentioned in yesterday’s Profit Radar Report, we need another up/down sequence. How come?

The dashed blue lines below highlight recent directional moves. None of them (rallies and declines) unfolded in a discernable 5-wave pattern. According to Elliott Wave Theory, 5 wave moves identify the prevailing trend. The lack of 5-wave moves explains why the market has been range-bound rather then trending.

On a smaller scale, the decline from the September 19 high appears like only 3 waves, thus far. Another up/down sequence (waves 4 and 5) would make for a small 5-wave decline and increase the odds of a trend reversal (a projection of the ideal next move was published in yesterday’s Profit Radar Report).

Until that happens, we note that the S&P 500 is near support, getting over-sold and ready for a bounce (the up portion of the up/down sequence?).

There is another simple reason why I want to see a clear 5-wave move lower before getting more bearish: The August selloff triggered a number of sentiment extremes usually seen near a bottom, and the subsequent rally triggered a number or breadth and momentum signals usually indicative of further gains.

Continued updates, projections, buy/sell recommendations are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF e-Newsletter to get actionable ETF trade ideas delivered for free.