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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5 ‘Keep it Simple’ Stock Charts and 1 Bearish Constellation

The rally from the June 3 low has created many bullish price and breadth patterns and studies (5 of them are discussed here). The market has followed through on them thus far.

However, the short-term Elliott Wave structure does not look bullish, and the long-term projection published in the June 2 Profit Radar Report (shown here) points to a serious speed bump.

In short, there is a measure of conflict between indicators. When that happens, I like to go back to the basics and keep it simple.

Resistance

The DJIA shows probably the most important resistance range to watch: around 27,300.

Support

The S&P 500 shows some important support levels to watch: around 2,910 and 2,875.

Short-term Trend Channel

The June 23 Profit Radar Report used this chart to simplify the short-term: “A break below channel support would unlock a pullback. The wave labels show the most bearish EWT-based option. It’s not ideal, but it seems more likely than other options.”

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Trend channel support failed the next day and unlocked the biggest pullback of June. It is possible to count the decline from June 21 as 5 waves, which cautions that the trend may have changed from up to down.

Leader Fatigue

The rally from the June low has been led by defensive sectors like consumer staples. Contrary to popular belief, such (defensive-led) rallies are statistically not doomed to fail.

However, the Consumer Staples Select Sector SPDR ETF (XLP) carved out a pattern with a lot of bearish potential. I recommended to go short at 59.07 on June 13. The stop-loss is now set at breakeven, which allows us to ‘play with house money.’

Overlap

Small cap stocks represented by the Russell 2000 ETF (IWM) are lagging. In fact, IWM fell below the June 5 high. If one wanted to count the June rally as 5 waves, June 5 would be wave 1, but yesterday price dropped below the June 5 high. This creates a bearish (wave 4 / wave 1) overlap (blue arrow) that’s not allowed and voids a short-term bullish Elliott Wave count.

Bearish Constellation

Not only small caps are lagging. The transportation and banking sector are too (see chart below).

Only two other times (July 1990 and July 1998) has there been such a big divergence between the S&P 500 and small caps, transportation, and banking. This is a small sample size, but it led to a rocky and negative performance over the next quarter.

Conclusion

Even during times where there is conflict among indicators, going back to the basics provides some general guidance.

It will take a sustained move above resistance to unlock higher targets, and a break below support to unlock lower targets.

Another big but temporary drop would certainly clear up the structure and provide a lot more certainty, but we’ll let the above levels indicate whether it will happen.

Continued updates 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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Russell 2000 Delivers New All-time High with Bearish Divergence

The Russell 2000 has been on a tear. On November 28, the R2K ended a 15-day winning streak when it touched red trend line resistance at 1,349 mentioned by the Profit Radar Report.

This pullback was to be temporary. The November 30 Profit Radar Report stated that: “The R2k is nearing an oversold condition and strong support at 1,309 – 1,296,” and recommended to buy R2k at 1,305. The corresponding level for the iShares Russell 2000 ETF (IWM) was 129.90.

Now the R2K is back at trend line resistance, but this time it carved out a bearish RSI divergence. There was no such divergence on November 25, which strongly suggested new all-time highs.

Bearish RSI Divergence, a Red Flag?

Under normal conditions, this bearish RSI divergence would be a serious red flag. However, the November 13 Profit Radar Report included the following observation:

The DJIA and Russell 2000 ended the week overbought, which normally will cause a pullback. However, if the S&P is truly in a wave 3 advance, stocks will continue to plow higher without much letup.”

The Russell 2000 has plowed higher ever since. The unique condition that allows for continuous gains despite on overbought condition is discussed here: S&P 500 Update – Expect the Abnormal?

Here is another statistic in favor of higher prices: Since 1979, there’ve been 12 other times when the R2K rallied at least 12 days in a row. A month later, the R2K was higher 10 times. 3 month later, the R2k was higher 7 times. 6 months later the R2k was higher 10 times.

The chart above provides long-term context for the R2K. The red trend line going back to 2011 is obvious resistance. If (and as long as) the R2K is able to sustain a break above this line, it may just continue higher.

Until it does, some caution is warranted.

Continuous updates for the Russell 2000, S&P 500 and other asset classes 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 profile 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, and 24.52% in 2015.

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

 

S&P 500 and Nasdaq Reveal Priceless Clues

For the past couple of months we’ve stuck to our short-term bearish and mid-term bullish outlook (the mid-term bullishness may morph into long-term bullishness).

This means, we’ve been buying dips, but refusing to chase trade to the up side.

We got the first buyable dip on September 9. Between September 9 -13 we bought the SPDR S&P 500 ETF (SPY), iShares Russell 2000 ETF (IWM), and VelocityShares Short-term VIX ETN (XIV).

1st Tell Tale Sign

However, the September 20 Profit Radar Report warned that: “In February and June stocks produced a breadth thrust from their low. Thus far however, the S&P 500 hasn’t shown any convincing follow through to the up side. The odds of soaring without a prior test or break of the lows have diminished. We are taking some chips off the table.

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

Over the next few days, we sold IWM and XIV for gains of 2.33% – 14.46%. We continued to hold SPY in case stocks move higher, but closed that position at breakeven on October 4.

The chart below, initially published in the September 11 Profit Radar Report, shows the potential down side targets based on Fibonacci retracement levels.

Ultimately, the scope of this correction depends on whether stocks will retrace the gains since the February low (S&P: 1810) or June low (S&P: 1,992).

We believe the retracement will be more on the shallow side, that’s why we bought the first buyable dip in September.

2nd Tell Tale Sign

The October 2 Profit Radar Report highlighted a concerning Nasdaq constellation: “The Nasdaq-100 and QQQ ETF are near trend channel resistance, and perhaps more importantly, near Fibonacci resistance and the 2000 all-time high (RSI and Nasdaq stocks above their 50-day SMA did not confirm this high). We expect new all-time highs later this year, but if QQQ is going to take a breather, it could be around 120+/-.”

Yesterday (Monday), QQQ matched the September 22 all-time closing high at 119.48, but RSI deteriorated even further, a bearish omen.

3rd Tell Tale Sign

Although the S&P 500 was stuck in a triangle with lower highs and higher lows, internal strength was wilting (the McClellan Oscillator and Summation Index made lower lows – see bottom graphs). The chart below was published in the October 9 Profit Radar Report.

Summary

It seems like stocks want to correct further before moving higher. This correction could stop in the 2,120 – 2,100 zone, but it could also go quite a bit lower.

We will be looking to buy the dip, because a number of indicators suggest a strong rally following this correction.

When we buy, depends on the structure of the decline, bearish sentiment extremes, and whether we see bullish divergences. The Profit Radar Report already identified a beaten down low-risk value ETF and an aggressive high octane ETN with a built in safety cushion to take advantage of the year-end rally.

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 profile 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, and 24.52% in 2015.

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

 

The Best Place for Tell Tale Signs: Small Caps?

The S&P 500 inched up a pitiful 0.03% last week. The Russell 2000 rallied 2.33%.

But that’s not the only reason small cap stocks are worth a second look right now.

As the weekly bar chart below shows, the Russell 2000 (NYSEArca: IWM) is bumping against significant double resistance.

The November 29 Profit Radar Report stated that: “Last week’s push higher happened during a holiday week on low volume, and therefore needs confirmation. RSI just barely failed to issue a bullish confirmation.

Small caps enter a bullish 1-month window (of relative outperformance compared to large caps) in mid-December. However, prior to catching this bullish seasonal tailwind, small caps will likely have to digest recent gains.”

This digestive period is now underway. Regardless of the immediate down side risk (which should be limited), the Russell 2000 sports the most pronounced overhead resistance.

A strong move above resistance may be the best tell tale sign of further gains. The Profit Radar Report will monitor the strength of any breakout to assess its longevity.

Simon Maierhofer is the publisher of the Profit Radar ReportThe 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 and 17.59% in 2014.

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Is the Russell 2000 Forming a Bearish Wedge?

The Russell 2000 sports an interesting chart.

Here is what Wednesday’s (April 15) Profit Radar Report observed:

The Russell 2000 rallied to a new all-time high today. The chart shows a wedge, which is generally considered a bearish formation. RSI did not confirm today’s high and MACD is barely positive (blue bubble). The 2-day RSI is short-term overbought at 96. The Russell 2000 also touched the upper Bollinger Band today.

History suggests a pullback, sooner or later. Aggressive investors may short the S&P 500 (NYSEArca: SPY) or Russell 2000 (NYSEArca: IWM) against today’s high.”

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Well, the Russell 2000 pullback happened sooner rather than later.

However, the Russell 2000 is still within the rising wedge formation (and above wedge support). There are two ways to draw wedge support (solid and dashed green line).

Notice also the open chart gap created by today’s massive gap down. Such chart gaps have a tendency to be closed – sooner or later.

In summary, while today’s drop comes at the right time to start the initial validation process of the bearish rising wedge, the Russell 2000 still needs a break below support (on increased volume) to unlock the potential for much lower targets.

Simon Maierhofer is the publisher 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 and 17.59% in 2014.

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

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Small Caps Lead Market – Good or Bad Omen?

The Russell 2000 index of small cap stocks just pushed to new all-time highs.

Is this bullish for stocks?

To find out, I’ve plotted the S&P 500 against the IWM:IWB (small cap/large cap) ratio.

IWM is the iShares Russell 2000 ETF (NYSEarca: IWM). IWB is the iShares Russell 1000 ETF (NYSEArca: IWB).

Based on the ratio (currently at 1.06), the recent outperformance is by no means extreme.

What if we pretend for a moment that small cap outperformance was extreme (reading of 1.10 or greater)?

The red lines mark prior periods of small cap outperformance (IWM:IWB > 1.10). The S&P 500 (NYSEArca: SPY) couldn’t care less.

If anything, one could make an argument that extreme small cap underperformance works as buy signal. The dashed gray lines highlight readings smaller than 1.03.

 

The gray overlay of the iShares Russell 2000 Small Cap ETF (IWM), makes it clear that IWM is only trading 3% above where it was a year ago. The S&P 500 gained 13% since March 2014.

Small caps are often portrayed to be the engine that pulls the train (or at least the canary in the mine), but that’s not true.

We dispelled this myth in July when many jumped on the ‘small caps are down, the market’s going to crash’ bandwagon.

Perhaps recent small cap outperformance is a reflection of the idea that a strong dollar hurts multi-national large caps with overseas income more than small domestic companies.

But what happens if dollar strength takes a breather?

One more thought: Historically, small caps tend to under perform in the later stages of a bull market.

Simon Maierhofer is the publisher 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 and 17.59% in 2014.

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