Is This Index Screaming SELL?

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I have a special opportunity for you today. I was recently speaking with Wyatt Investment Research's own Jason Cimpl, editor of Trademaster Daily Stock Alerts , and we were discussing the action in small cap stocks this September.

Jason spends most of his time analyzing market trends and finding subscribers the best stocks to jump on for great trading opportunities. One of his many talents is differentiating between what trends are likely to hold - and which are likely to breakdown. Yesterday he alerted his subscribers to a trend in an index that Small Cap Investor Daily readers will find interesting.

Rather than tell you what Jason said, I'll let him speak for himself as he and I discuss what Jason's subscribers received in their inbox yesterday before the market opened. By the way, if you want his trading alerts too, you can sign up here.

Ian: "Jason, can you share with Small Cap Investor Daily readers a bit of what you see going on in the markets?"

Jason: "Yes, it's been an interesting month. Wednesday the bears finally won a day and brought the market lower. The month of September is almost over and Wednesday was only the second multi-point decline in this month. Much like the video (available to subscribers of Trademaster Daily Stock Alerts) depicted, the SPX was up early in the week, and now I expect a decline to 1115 or 1100 to end the week. The market is long overdue for consolidation."

The pullback should be a buying opportunity. The daily charts do not show reversal candles for the indices. Additionally, the charts are within the upward price channels formed a few weeks ago. Until a reversal candle unfolds, or the charts break below channel support, or a support level mentioned below, the upward trend is alive.

Now, I have been a bull almost the entire month, but small cap picks have underperformed the market. And that brings up an interesting point.

Many traders have questioned the durability of September's bullish move. One concern about the latest rally is the notable weakness in small cap stocks. Although the Russell 2000, the benchmark for small caps, is up 13% after it soared to 672 from 590, the index is fighting the 675 resistance point.

As we look back a few months we notice that advances in the Russell 2000 have come to a sudden halt each time it approaches the 675 area. In addition to this resistance, the index has yet to take back its June high of 677.15. Almost every other major U.S. index has exceeded the June highs. The reluctance of the Russell 2000 index to make a move past that high brings doubt into this September rally
."

Ian: "Do you think that lack of small cap participation in the recent rally is going to hold stocks back?"

Jason: "Well, the underperformance from small caps is a threat to the rally, but I remain bullish. The market has increased on high volume and with better than expected economic data. Small caps need to confirm what the broader market is telling us, and there are reasons to expect that they will soon.

Let's take a closer look at a daily chart of the Russell 2000,



Weakness in small caps prevented the Russell 2000 from making a higher high in July and September. Although it is one of the few indices that have not been able to take back the June/July highs it looks poised to do so this month. The bullish outlook comes from an increasing 200 day moving average as reflected in the continuing upward trend in the blue line. "

Ian: "We frequently discuss moving averages in Small Cap Investor Daily. Can you refresh our readers' memories and let them know how you use moving averages to spot trends for subscribers to Trademaster Daily Stock Alerts ?"

Jason: "Sure, we use them all the time. The moving average is the most basic and quickest way to spot trend. When a moving average is increasing the trend is said to be "up." If the stock, or index in the case of this discussion, is trading above its moving average, the trend is considered strong. Additionally, the more periods used for the average, the more reliable the trend becomes. A five day moving average is less reliable than a 100 day moving average for identifying the trend because it has fewer data points.

In the chart above we can clearly see that the 200 day moving average is increasing. Additionally, the index trades above its 200 day moving average. The long term trend is bullish. A strong bullish trend will have no problem taking out previously mentioned resistance levels. Traders should prepare to get long on pullbacks."

Ian: "Thanks for sharing your thoughts today Jason. We'll be keeping a close eye on the Russell. Where can readers go to follow more of your technical analysis?"

Jason: "No problem. I think that this type of trend analysis is a great compliment to fundamental analysis. Together, they can help investors get in and out of great stocks at the right time. Readers can learn more about Trademaster Daily Stock Alerts by visiting the website at: www.trademasterstocks.com .

As a subscriber to TradeMaster you are able to watch weekly videos. Every Saturday two videos are posted to the website. One video will review the activity in the indices and provide expectations for the upcoming sessions. The second video is a crowd pleaser that goes over a list of stocks and details how to buy and when to sell each pick. I am going to try and post one video today, and the second will be posted Sunday this week."

Ian: "Sounds great Jason. I know from working with you over the years that these videos are extremely helpful when getting ready for a week of trading action. And next week economic data picks up so it could be an interesting ride."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

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