Sunday, November 30, 2008

The small caps are at an inflection point

As I mentioned on Friday, the market leading Russell 2000 small cap index (IWM) is clearly at an inflection or "pivot" point. You can see it in the falling wedge formation above, and note that this pattern is typically a sign that a move is becoming exhausted. The rising wedge can be an excellent topping formation, see this awesome example. In other words, the longer term decline seems to be loosing steam. On the intermediate term time frame however, the small caps are running into resistance at the upper end of this wedge as evidenced by Friday's tail. Also, volume has been declining and all the RSI and stochastic "oversoldness" has evaporated in the past week. So we are ripe for a nice sell off from here but if IWM can push a little higher it should be able to pop up to and test the 50 dma currently aty $53.79 (which would be a very good place to enter shorts). One encouraging sign for the bulls is the CCI crossover that occurred on Friday, this is a very bullish buy signal but again, volume was weak (didn't confirm). So what I'm saying is that, the market is unlikely to sit here. The most likely scenario seems to be a drop down to the lower end of the wedge around $40 with the possibility of making new lows, but a pop to $53 is certainly possible. Good luck, I'll be trying some IWM shorts tomorrow morning but if the market does break out I'll be picking up TINY calls.

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