Russell 2000 sitting pretty… (I think/hope :) )

Hi all,

I am trying to incorporate more individual stock trading into my trading style, but I am still (for better or for worse) trading the various instruments which follow the Russell 2000 Small Cap Index (mostly TNA, TZA, etc).   Now, from a high level point of view, the Russell and the S&P 500 will move in generally the same direction, but there can be minor variations in terms of daily movements, support levels, etc. Since I trade the Russell, I tend to largely look at it as my primary tell, and rely on the excellent market recaps of @chessNwine for keeping me up to date on what other major indices are doing.

Let me summarize my thoughts here, and then I’ll expand on them, below,  item by item.

I believe the Russell is sitting on multiple, MULTIPLE support reference points now, all of which have shows to be very resilient in the past, so I feel the benefit of the doubt has to go to them holding here again. Having said that, I admit that the possibility is for those to break, but there is another layer of support just under us, and only if THAT broke, in a convincing fashion, would I change my intermediate term bullish outlook. There was also a reference to the Russell putting in a double top right here, with the 2007 highs – I feel that is extremely premature to say, and that, based on what we saw in 2007, we should have weeks to observe its behavior, before getting long term bearish.

So, without further ado, here are my reasons (probably from weakest to strongest)

a) we’re sitting on a short term support trend line, since the post-Japan bounce:

The fact that we failed to follow up Thur’s impressive recovery with a strong day on Fri was disappointing, but not unprecedented. Just like we didn’t bounce straight up in mid Apr, we don’t have to bounce straight up here. Back then it was the S&P downgrade which sent the markets down, on Fri it was the dollar strength, from renewed worries about the Euro and Greece (how many times will that particular shock/surprise move the markets, eh? Anyone else getting tried of this?) But considering that, even with the dollar ripping to the upside, we still failed to make a new lower low on the Russell, I don’t take that as a bearish sign for the immediate future.

b) we are sitting on a multi-month support trend line, dating back to Sept:

Now, to give bears their due, I should admit – support lines, like rules, were meant to be (sooner or later) broken. The multi-month support trend line had a different slope  going into Jan.  In fact, that support trend line did NOT hold in Jan, failing us even before the full extend of the Egypt situation hit the other indices:

c) the comment in the above  chart leads me to ,y strongest reason(s)  why I have so much faith in the intermediate term, for the Russell: the moving averages:

The 50DMA has provided  a great deal of support for the Russell, lately, managing to hold it up through the Egypt problem, the Libya issues, and the S&P downgrade. The only time, in the recent months, when the 50 proved unable to support the index was with the Japan catastrophe, hitting us while the markets were still little jittery from the Libya worries. But then the 100DMA proved to be a great backstop, holding us and pushing us back up.

I am not so foolish as to believe that we cannot crash through the 50DMA here and now.   The answer to that question will depend on (i) what happens in Greece  together with (ii) how much of that is already priced in.  However, the 100DMA is just below us, and I believe, based on what’s happened in the recent past, that will hold as our backstop. That is my short/intermediate term theory, and that is also my stop loss, on any bull  Russell instruments I might be holding, when that happens. A confident push below the 100DMA on the Russell means to me, in the short/immediate term, bail on the likes of $IWM and $TNA.

On a slightly different, but Russell related topic, I just read Scott’s blog post about the Russell, in which he calls (or suggests?) a double top for the Russell, with a target of 800 followed by 760. I don’t know what time frame he means, but let’s look at the long term weekly chart of the index:

Last time the Russell has come up into what proved to be the ultimate top, it hovered there for 8 weeks, before finally pulling back. Eight weeks! And even then, after the pullback, it tried to re-test those highs again, and only having failed in that attempts, did we see the beginning of the bear market.  Are we seeing anything like that here and now? Not even close.  Of course that doesn’t mean that we won’t start a new bear market on Mon, anything can and will happen, right, but, in my opinion, one cannot put up a chart, and use only one piece of information from it to draw conclusions, ignoring the rest (in this case, using the fact that we’re near the previous market top to call for an immediate  reversal, without giving the chart time to show us if it’ll mirror the previous topping pattern).

The current trend is higher. It’s been higher on different time frames since Mar 2009 and  since Sept 2010.  But nothing moves in a straight line. I will doubt my intermediate term “trend is higher” theory with a break of the 100DMA on the Russell.  There’s no point in even thinking about a new bear market now:  in 2007, after a 4 year run, we needed 2 months, plus another attempt 4 months later, before the market gave up, and reversed into a bear market. Here and now, we’ve only been running for 2 years, latest batch of earnings is good, the Fed shown it wants to support the market and the economy, and we’re consistently making new highs (we just made new highs less than 2 weeks ago!!!)…  Come on…

The Trend Is Your Friend, and currently, until proven otherwise, The Trend Is Higher:

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