Volume has picked up dramatically in the Russell 2000 today (article written around 1:40 PM). The Russell 2000 is used by many professional fund managers to both profit and hedge positions. The move lower this morning pushed the IWM ETF through the Lower Bollinger Band and just as in the case of the S&P, sets this small cap ETF up to break the long-term pattern of higher lows. The chart below shows the pattern of higher lows established throughout 2013. The most important level now for the IWM is the $107.28 level which was the low back in November before the IWM moved higher into January. You can see in the chart below that the 200 day exponential moving average (EMA) is sitting far below the past 6 months. A move that low would be incredibly bearish for stocks.
The Rate Of Change indicator is deeply negative which is almost always followed by either a steep drop lower or a rebound in prices. A reading of negative 5.67 is a signal that a bigger change is coming to stocks.
MACD remains decidedly negative and is continuing to drop.
The Slow Stochastic is oversold but is still pointing to lower prices ahead for the IWM. On January 23 a strong sell signal was issued by the Slow Stochastic shortly after the IWM has made a historic high. This is typical of a market top and needs to be watched closely.
Russell 2000 Outlook
The Russell 2000 has often been a bellwether index worth watching. The classic signal of sell given within a couple of days of a new historic high is often a strong indication of a market top being put in place. Meanwhile the Rate Of Change is signaling that a bigger move is coming. It cannot predict which way but historically I find that this signal with such a deeply negative number is more often followed by a bounce that lasts longer than a day.
Any move toward the 200 day exponential moving average (EMA) will be very bearish for stocks and needs to be monitored daily. The IWM has been on a incredible rise throughout the year. It is now showing signs of breaking down. Any rally back up must negate the lower low which today’s move has created. Momentum is deeply negative for the small cap fund and many fund managers appear to be unloading some positions both on the buy and sell side so it is difficult to determine what their overall outlook is. Volume though is about double what it normally is on the IWM.
Weekly Initial Unemployment Insurance Claims
As I mentioned in my look at the SPX, remember that last week the Weekly Initial Unemployment Insurance Claims rose to 348,000. As it nears the 350,000 mark almost always the market direction has trouble. Later this week we will see what the employment numbers look like but if they surprise and show more weakness after December’s numbers, watch for stocks to continue to stay weak.
Trading For Pennies Strategy
I am continuing to use the trading for pennies strategy which is discussed on the members site. However I have shifted to the SPY ETF due to higher option volumes. In this market however, the best trades for my portfolio have been in the Spy Put Options strategy trades as the market continues to drop.
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