There seems to be a debate about the usefulness of technical
analysis. Some see it as form of voodoo, while even the best of
technical traders view the charts as more of an art form than an
exact science. There are piles of books written on the
subject and one of my first mentors in the business told me
technical analysis was all I needed to succeed in the trading
I find technicals useful because a good deal of hot money is
run by technical and systematic traders and there are many
fundamental traders who look at the charts to confirm their
ideas. Whether good or bad, a rundown of the chart picture
in the Russell 2000 may be worth reviewing given today's price
What's the pattern?
The Russell 2000 ETF (
) is showing signs of a classic, or text book, technical
top. There is a small head and should formation which was
confirmed by today's price action and breach of the recent low
near $103.30. On the chart the shoulders are marked
with an "S" and the head is marked with an "H". The neckline
connects the low of the shoulders.
Is there a positive?
The positive for the market rests in the fact that the
formation is not large, and is only about $2.30 wide from the top
of the head to the neckline. The textbook minimum projection is
in the $101.00 area which is not too far from a day gap formed on
at $101.38. The formation is not projecting a massive decline, at
least by text book standards.
There is a possible shelf of support off the May 22
and July 18
highs between $100.38 and $99.80. Moreover, there is
a loose trend line off the fall low which intersects around the
$100 area. A secondary shelf of support may rest near the
spring highs and June low around the $95.00.
Movement over Wednesday's low near $104.00 would probably
negate the formation and turn the picture friendlier.
How about momentum?
In terms of momentum, the 14 day RSI failed to make a new high
with the market and this suggested weakness and an unconfirmed
rally. The positive for the market could rest in the
ability of the market to become quickly oversold. Over the last
year, it has been unusual for the 14 day RSI to sustain readings
below 30. A few hard down days could put the 14 day RSI in this
How about relative value?
One last factor which caught my eye was the wide ratio spread
between the IWM and the S&P 500 ETF (
) - the price of IWM divided by SPY. Notice the ratio stalled
against the 2011 lows and the 2012 highs. The spread looks
like it is taking a breath, and this may be confirming the need
for the market to correct before trying another leg higher.
In conclusion, they say a picture is worth a thousand
words. We have reviewed two pictures of the market
for a story. You can always fade the technical picture and
many traders do. However, it is worth noting what the chart
watchers are seeing and thinking. We'll see how it
plays out in the coming days. Good luck.
At writing, the author of this article was long the inverse
Russell 2000 ETF (TWM) as part of a portfolio hedge.His position
could change at anytime.
ISHARS-R 2000 (IWM): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
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