Stuck in a RUT or Ready to Soar

• Posted by Greg Harmon
• on July 8th, 2014

The Russell 2000 ($RUT, $IWM) has everyone’s attention. Many follow it as the ‘leader’ of the market, pulling the other indexes along with it. Some look at the mid and small cap names and see the health of the market and the economy. As a technical trader though when I look at it I see an index at a crossroads. Take a look at the chart below.

The bottoms in February and May along with the tops in March and July set a roughly 120 point range in the index. To be fair, it has been in this range since November, but the last 5 months have really established the range. With the long red candle, a Marubozu, on Monday it appears to be pulling back for another trip to the bottom. And guess what? Pundits miraculously are calling for a 10% correction. Seems they walked out in the middle of their Technical Analysis 101 class. They may be right in the end, but the trend remains higher today. Monday’s price action closed a price gap from last week, and it remained above the 20 day Simple Moving Average (SMA, rising blue line). You can see since the beginning of the year using the 20 day SMA as a guide to be long or short would have served you well.

If it crosses down through that line then the trend has reversed again and the pundits will surely tell you they were right. They have other factors on their side as well. The momentum indicators shown (RSI and MACD) are both moving lower. Technically speaking, if the MACD crosses down that is bearish and the RSI moving through the mid line at 50 would be bearish. But both momentum indicators are actually still in bullish ground. In fact if the RSI were to reverse higher here with price it would create a very bullish situation, a Positive RSI Reversal. This is where the RSI bottoms below the prior low but the Price bottoms at a higher low, and it would target a 43 point move higher in the Russell.

Tuesday may be a very interesting day. Will long holders end up stuck in the Russell 2000 as it heads to the bottom of the channel? Or will they be excited as the index gets ready to soar? Let’s find out.

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