Tuesday, May 13, 2014

Is the Russell 2000 in trouble?

I saw this item on maketwatch.com – banner - ETF Focus Archives | Email alerts - May 9, 2014, 5:01 a.m. EDT - Small-caps’ slide reflects a market in trouble - Opinion: Stock bulls find danger under the Street’s surface.

The author who I assume is a technical analyst is worried about the failing leadership of the smaller US companies. The author states – “But under the surface troubles loom with markets. (See small-cap chart below)” – a weekly IWM etf with a possible head & shoulders top – a very scary technical call The author then goes on to display a number of free charts from stockcharts.com

So here is the problem with the Russell 2000 - “Small-caps’ slide reflects a market in trouble” analysis. First the author overlooked the non-confirmation of the larger cap Russell 1000, the Dow Transports, the Dow Industrials and the SPDR Financial sectors. Second the author overlooked the structure of the Russell 2000 to be a basket of domestic focused business – unlike the global focused business of the larger cap Dow Industrials and the S&P500. Most likely we are just seeing a shift of capital away from domestic focused co’s to global focused co’s Third this head & shoulders pattern is not valid unless the there is a broken neckline – which did not occur – (more like a simple A-B-C correction) and finally the Russell 2000 can flash a false “buy” signal as it did in mid 2008 just before collapsing - and the false “sell” signal as it did in mid 2011. Finally the cumulative NYSE advance decline line (which leads) has not yet broken down

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