Listen Up! The Russell 2000 Is Talking!

by Serge Berger | July 10, 2012 9:30 am

Most of my trading activities focus around trading the S&P 500, and one of my indicators for clues as to the next move in the S&P 500 comes from the small-cap Russell 2000.

Two things I pay especially careful attention to:

  1. Relative out- or underperformance of the Russell 2000 versus the S&P 500.
  2. Candlestick patterns.

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Of course, when paying attention to what the Russell 2000 is saying about the S&P, it’s hard to ignore what it’s also saying about itself.

While both indices are well into positive territory for the year (the S&P 500 is up 7.2% this year, while the Russell 2000 has gained 8.55%), the S&P 500 has underperformed both the Russell 2000 and the transportation stocks so far in July.

I use both the Russell 2000 and transportation stocks as leading indicators — the fact they are currently somewhat outperforming the S&P 500 has me thinking that downside might be limited for the coming week or so.

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Because small-cap stocks are more volatile than large-cap stocks, the Russell 2000 most often displays clearer candlestick patterns than the S&P 500.

The current “topping” pattern candlesticks are again clearer than those on the S&P 500 and indicate a pause in the up-move might be at hand. And that’s an important difference — it signals more of a pause, rather than an outright strong sell signal.

More importantly, however, the Russell 2000 still is above its 100-day moving average (blue moving average line), which the index often respects as support at least for a few days, and might do again for now.

Overall, stocks remain in a tricky environment where headlines and rumors dictate the tape, and that makes it challenging to pull money out of the markets. However, if we focus on a clear time frame and pick our spots, then profitable opportunities still exist.

In the case of the Russell 2000, its relative outperformance in July leads me to pick the 790-800 area as potential near-term support. Stops should be set just below there, as a move well below 790 could accelerate a down-move.

Serge Berger is the head trader and investment strategist for The Steady Trader[1]. Sign up for his free weekly newsletter[2].

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