Can Small-Cap Stocks Find their Mojo?

A troubling pattern has us watching for downside

   

Can Small-Cap Stocks Find their Mojo?

The latest market pullback is not like any of the recent others.

For starters, we are entering the 32nd month since the last 10% pullback in the S&P 500.

The average bull market on the other hand sees a 10% pullback every 16 months, implying this bull market has likely gotten ahead of itself and is due at a minimum a mean reversion.

Prices Lead and Reveal

Another significantly different detail about the latest market pullback is the way the former leaders have gotten slaughtered.  As discussed in my previous article, “Changing Winds for the Market Leaders,” the former market leaders have declined in price significantly more than other companies.

The iShares Biotech (IBB) has now fallen over 20% from its price highs. Google (GOOG) fell 15% to its lows.  These kinds of declines in the market’s darlings did not occur over the previous few years, not unless the broader market was also participating in such downside, which thus far has not occurred as the S&P and Dow are now the safe havens.

When leaders become laggards, savvy investors perk up – it’s a sign of overall market weakness.

That weakness may also be setting up a very bearish pattern on iShares Russell 2000 (IWM), which tracks small-cap stocks.  The chart shown below was provided to our subscribers along with commentary the past few weeks when we first brought attention to the bearish pattern.

In our April 30 Technical Forecast we highlighted the bearish head-and-shoulders potential in small-cap stocks along with the chart shown below: “IWM’s longer-term head-and-shoulders pattern remains an intermediate-term potential.  A close below $106 will confirm it.”

IWM Can Small Cap Stocks Find their Mojo?

So far $106 has held as the market continues to form the right shoulder, but if it breaks … look out below.

Video: How We Used Sentiment for a 65% Gain in Gold

Adding to the risk is a similar pattern also discussed in our Technical Forecast showing up in the PowerShares QQQ (QQQ) as well.  Both of these markets are warning of potential major tops as investors start to lose interest and their prices roll over.

The head-and-shoulders pattern is just a fancy name to help keep tabs on supply and demand, and that supply and demand shows up in price patterns. The initial stall in investor demand forms the left shoulder and head, the weakened attempts at any further upside form the right shoulder, and then ultimately a breakdown below former key buying price levels at the neckline ultimately results in self-fulfilling profit salvaging and further price erosion.

Price is what matters most to investors, and if price breaks below these key levels of former demand, it likely will trigger further exodus as they scramble to keep remaining profits.

We’re waiting patiently for such price breakdowns and to implement our high-probability trade setups to take advantage of any further price deterioration.

The ETF Profit Strategy Newsletter and Technical Forecast keeps investors abreast of the changing winds of the market.  The recent weakness by the Nasdaq and Small Cap indices is a new development in the market that needs to be watched as historically when former leaders become laggards it often precedes major trend changes.

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Article printed from InvestorPlace Media, http://investorplace.com/2014/05/small-caps-breakdown/.

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