Monday, November 19, 2018

RUT Russell 2000 Small Caps Daily Chart; Death Cross

The Russell 2000 small caps print a death cross (black circle). The death cross occurs when the 50-day MA stabs down though the 200-day MA. A golden cross is when the 50 pierces up through the 200. It is always useful to discuss what a death cross means since the television pundits automatically profess doom and gloom from the feared death cross. Run for your lives! Protect the women and children! The media likes to whip viewers into a frenzy with sensational headlines such as the 'death cross' which will bring in more advertising revenue. What always occurs after a death cross, every time, and you hear it again now, is the pundits telling everyone that stocks will sell off going forward.

That is typically not the case (initially). When the death cross occurs, stocks typically rally (at first). It takes a lot of damage to price to cause the 50-day MA to roll over to the downside. By definition, the 50-day MA is the average price over the last 50 days. After the SPX expels all that negative energy over days and weeks creating the drop in the 50-day MA, when the death cross finally occurs, price is typically ready for a relief bounce or bounces. This is why you typically see price bounce like in the RUT chart above. You see this behavior occur over and over again with the death crosses.

When a bounce occurs, those that do not understand charts (which is the majority of folks), will proclaim that technical analysis is rubbish. They will say the death cross declared misery ahead and instead the price rallies higher. All this confusion gives technical analysis a bad rap. There are simply too many people touting that they know what the charts say but they actually do not know shine from shinola. However, it makes things entertaining.

When price typically bounces as the death cross occurs, the key is to watch if price moves back above the 50-day MA. The only way the 50 could curl higher is if price ran back above this moving average. That would tell you that the death cross may be short lived. If price rolls back over to the downside after the short-term upside move, the death cross will remain in play and stocks will be weaker for weeks and months to come.

The green lines show a potential inverted H&S pattern developing. 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 6:48 PM EST: The RUT was taken to the shed out back behind the garage and beaten severely. The Russell 2000 loses 31 points, -2%, to 1496 in the Monday session testing the right shoulder of the inverted H&S.

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