Friday, October 03, 2008

Small Caps Crushed, H&S Top Completes

Its a disturbingly beautiful pattern, this massive head and shoulders top on the Russell 2000 (previous post on it). I've been talking about the bear market in the small caps for nine months now and there is still no end in sight. In fact, based on the topping pattern above we are only about halfway through this thing in terms of price decline. Late this week the small caps accelerated to the downside losing 12% this week and closed at three year lows well below the neckline at $66 (IWM). I encourage readers to not take this breakdown in the small caps lightly. If you are still holding stocks for the long term you might be thinking that its too late to sell. Based on the measured rule I'm expecting a decline to roughly $45 on the IWM, that's a 30% decline. Selling before a 30% decline is not late in my book. I will note however, that the markets are getting very, very oversold and the VIX is at nosebleed levels. Then theres this bailout thingy and an emergency fed rate cut any day now to juice the market. The odds of a big and possibly prolonged bounce remain high, but thats all it will be, a bounce. More later this weekend.

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