Wednesday, November 6, 2013

RUT Russell 2000 Small Caps Weekly Chart Ascending Triangle Upward-Sloping Channel Overbot Negative Divergence Price Extended

Tech and small caps are the big story this year. Typically, for the business and economic cycles, tech and small caps will lead the broader markets higher and this confirms the stock market upside and strong economy. However, we are not in Kansas anymore. The Fed is the market pumper with the QE easy money policies. Companies use the money to fund buy-backs and investment banks use the money to play the long side of the market instead of promoting business and economic development. The targeted areas for the easy money are of course tech and small caps since traders expect them to run due to the business cycle but it is the tail wagging the dog. Everyone knows what should happen with the business cycle so they flock into tech and small caps (tech and small caps are not running higher due to a stronger global economy, instead, they run higher due to easy money policies).

The green ascending triangle has a vertical side of 200 to 250 handles so the breakout at 850 when Congress kicked the political can down the road to begin the year results in a target of 1050-1100 that is achieved. The brown upward-sloping channel continues to contain price and send the RUT higher. The spank downs (red arrows) are easy enough to call due to negative divergence but a larger correction of -10% and more, expected all year, has not materialized once the selling begins. Price has held the 20-week MA for the last year. The indicators are all negatively diverged with RSI and stochastics at or coming off overbot conditions. The blue dots show how price is extended above the moving averages which creates a need for a reversion to the mean (lower prices).

The current limits on the channel are 1060-ish at the lower rail and 1150-ish at the top rail. Watch the maroon lines in the right margin to see if negative divergence firmly prints if price moves into the 1020-1050 area over the coming days or week or two. The expectation would be that price either weakens from here, or, if it rises into the 1020-1050 zone, this will only create another top and roll over to the downside. One of these spank downs should result in a much more substantive downside correction. The next couple weeks are key. 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.

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