Thursday, July 18, 2013

RUT Russell 2000 Small Caps Daily Chart Bull Flag Overbot Negative Divergence Potential Island Reversal

The green bull flag was mentioned a couple weeks ago as it broke out from the center consolidation flag and sure enough, the bulls are milking it for all it is worth. The first leg is 100 to 110 points so the second leg targets 1050-ish. Yesterday's high is 1046, close enough for government work, to fulfill the pattern but price tagging 1050 is not at all unreasonable. The indicators are all negatively diverged wanting to see a spank down occur, sans the MACD line which would favor the print at 1050-ish. Note the gap up from 1020 to 1030 creating an island so an island reversal may occur with a drop back down through the gap, or, price may simply drift lower and fill the gap. The weekly chart is setting up with negative divergence as well so the projection is sideways to sideways lower for RUT for the weeks ahead.

Traders are chasing into small cap growth since they believe in the economic recovery cycle. Small cap growth is where you want to be as a global recovery begins and starts chugging along with gusto, however, the economic data do not paint that picture. UPS, the shipping bellwether, laments about a sick global economy. Ditto KO weak sales and they sell Coke in virtually every location on Earth. Economic data such as Housing Starts are dropping instead of rising. China is lowering its growth forecasts that is causing headaches in Asia and Europe. And on and on, these are simply a few recent examples. Hedge fund guru Peltz brags about a large position in DD yesterday. Again, in a robust global recovery, chemicals, resins, paints and plastics are the building blocks. Companies such as DD and DOW are great plays, however, their weekly charts are not impressive moving forward. Today, AKZO, a huge global chemical company, reports a lackluster economic environment, directly contradicting Peltz's call for DD. Folks are simply running into the sectors that they think should do well based on the business cycle but the economic data does not support where the traders think the business cycle is at.  It makes for interesting times ahead. This information is for educational and entertainment purposes only.  Do not invest based on anything you read or view here.  Consult your financial advisor before making any investment decision.

Note Added 8:07 AM:  Speaking of chemicals and paints, SHW misses on the top line revenue and lowers guidance, another stock disagreeing with the Peltz hypothesis.

Note Added 10:25 AM:  RUT tags 1050 to officially fulfill the bull flag pattern.

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