Russell 2000 Looking Weak — Set Up Your Defense

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On Thursday, stocks fell sharply in the morning but regained much of the decline by 3 p.m., only to lose again in the last hour. At the close, the Dow Jones Industrial Average and the S&P 500 fell about 0.3%, but the Nasdaq was hit with a decline of 0.5%.

The early decline was the result of data from China showing that its exports had fallen 10% year-over-year last month. This decline from the world’s second-largest economy started a rumor that China may devalue its currency, the yuan, in order to increase foreign demand for its products.

However, the immediate result was a flight to safety and an increase in bonds, gold and utility stocks.

The afternoon advance was the result of bargain hunting by some fund managers and traders. However, banks posted the biggest losses because a China scare could delay a rate increase by the Federal Reserve this year. The Wall Street Journal reminded its readers that in September 2015, the Fed opted not to raise rates because of market volatility related to China. Banks in Europe fell 2.6% on average.

Crude oil rose 0.5% to $50.44 per barrel.

At the close the Dow Jones Industrial Average fell 45 points, ending at 18,099; the S&P 500 was off 7 at 2,133; the Nasdaq fell 26 points to 5,213; and the Russell 2000 closed at 1,216, down 11 points. The NYSE’s primary exchange traded 878 million shares with total volume of 3.5 billion shares and the Nasdaq crossed 1.7 billion shares. On the Big Board, decliners outpaced advancers by 2 to 1 and on the Nasdaq, decliners led by 2.6 to 1. Blocks increased to 5,263 from 4,134 on Wednesday.

I noted yesterday that the stock market’s sectors seldom move in tandem, but as the momentum builds more and more sectors and indices take up the trend. We studied two sectors of the 500, the Health Care SPDR ETF (NYSEARCA:XLV) and SPDR S&P Homebuilders ETF (NYSEARCA:XHB), and both appear to be breaking down.

Russell 2000 (IWM) in trouble
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Today we study the recent moves of the iShares Russell 2000 Index ETF (NYSEARCA:IWM): This ETF covers the small-cap stocks and led the market to new highs as recently as September. The IWM violated its 50-day moving average three days ago after failing to break the September double top. Now it is in danger of closing below the support line at about 119, the penetration of which would result in a lower low and an intermediate change of direction to “down.”

Conclusion: Despite the potentially negative charts of two days, stocks could stabilize and make a run to a new high. However, I must caution that earnings are not strong, and the Fed may not carry through with a rate increase.

The yellow flag is flying, and so it is time to seek refuge in cash, gold, utilities and other defensive investments as part of an over-all defensive strategy.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.


Article printed from InvestorPlace Media, https://investorplace.com/2016/10/russell-2000-weak-defense/.

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