Russell 2000 and Transports at Crossroads?

The Russell 2000 (RUT) and Dow Jones Transportation Average (DJT) racked up some pretty significant losses since their 2015 all-time highs.

From the 2015 peak to the 2016 trough, the RUT lost as much as 27.23%, DJT as much as 31.22%. The S&P 500 lost ‘only’ 15.20%.

It was the prevailing opinion for much of 2015 and early 2016 that the RUT and DJT would lead U.S. stocks into the next bear market.

It is correct that small cap underperformance is one of the stages of an aging bull market, and in line with our analysis (view 3 Stages of a ‘Dying’ Bull Market). However, the timing for an immediate bear market didn’t seem right.

The February 11 Profit Radar Report listed six reasons why stocks are likely to rally. The ‘six reason buy signal’ is also discussed here.

After almost three weeks of rising prices (RUT up 11%, DJT up 17%), the RUT and DJT have arrived at their first inflection point.

Russell 2000 (RUT)

The RUT is back-testing the ascending green trend line (currently at 1,045), which originates at the March 2009 low. Sustained trade above this trend line is bullish until the signal is reversed.

Dow Jones Transportation Average (DJT)

The DJT is threatening to break above the 7,400 – 7,500 zone. This zone served as support a few months ago.

This is not only price resistance for DJT, it’s also momentum resistance as DJT’s prior rallies failed at similar RSI readings.

Conclusion

When the Profit Radar Report issued a buy signal at S&P 1,828, it wasn’t clear whether this rally would only move to the initial up side target at 1,950 or beyond.

Based on investor sentiment, there was a distinct chance that a runaway rally (with higher targets) would develop.

The S&P is not in the clear yet, but the RUT and DJT charts may help gauge the broad market’s prospects. RUT and DJT above their respective resistance levels is a positive for the S&P and other indexes.

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, 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.

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ETF Trade SPY: Russell 2000 Nearing Danger Zone

The Russell 2000 is one of the top performing indexes this year. It outperformed most broad market and sector indexes, but is nearing resistance that’s kept a lid on every advance. Here’s how to tell if the R2k is ready to top out.

“Are we there yet?” If you are a parent you’ve no doubt heard this question.

Kids can be impatient and don’t read maps or GPSs, so the question makes sense.

Investors often ask themselves a similar question. Instead of “are we there yet?” they ask, “how much up side potential is there?” or is the stock ‘there’ (at its peak) yet.

The closest thing to a GPS for stocks are trend lines. Trend lines outline the path for stocks, indexes or ETFs.

The chart below shows a parallel channel for the Russell 2000 Index (Chicago Options: ^RUT).

At first glance it looks like the Russell is ‘getting there’ or approaching a possible top.

Like a tenacious woodpecker, the Russell 2000 keeps chipping away at parallel channel resistance without out actually penetrating.

This hasn’t hurt performance. Since the channel is ascending, the Russell 2000 can continue higher without ever breaking above the channel. But we see that almost every touch of the upper channel line (red circles) caused a temporary pullback.

The rally from the November 2012 and June 2013 low has been very steep and with all things that are too good to be true, the Russell will eventually give back some (or most?) of its gains.

RSI (gray circle) is already showing signs of fatigue. Although this is a small warning signal, RSI can lag for months and RSI-based sellers may miss a big portion of a rally.

The chart for the iShares Russell 2000 ETF (NYSEArca: IWM) and Vanguard Small Cap ETF (NYSEArca: VB), although not as crisp and clean, look very similar to the R2K index.

Since the Russell 2000 has outperformed the S&P 500 (SNP: ^GSPC) to the up side, it will probably outperform the S&P 500 to the down side. Now don’t go out and short the R2K or S&P right now, but you may mentally prepare for a possible shift from an up to down trend.

How To Spot a Top

Stretched rallies have a tendency to flame out with a trend channel over throw, where prices stage one last hurrah and spike above the channel. A close back below the channel often concludes the rally and kicks off a prolonged decline.

Any decline has to be confirmed by a drop below resistance, which didn’t happen in April and June (green circles).

The ETF Trade SPY is a free weekly feature that identifies ETFs near major inflection points created by support or resistance levels.

Prices near support/resistance levels tend to be great setups for low-risk trades. Why low-risk? Support/resistance is used as stop-loss and is an effective risk management tool.

If you only enter trades where your potential gain is bigger than your potential loss, you win.

To receive future issues of the free ETF SPY follow iSPYETF on Twitter @ iSPYETF.

ETF SPY History

XLK: July 24, 2013, ETF SPY predicted higher prices for XLK. Click here for XLK support and target levels.

Dow Theory: July 19, 2013 ETF SPY predicted higher prices for Dow Jones Industrial and Dow Jones Transportation Averages.

XLF: July 12, 2013 ETF SPY predicted higher prices for XLF along with a price target.