The Most Important Chart to Watch Right Now

The Most Important Chart to Watch Right Now

The major indices scored small gains on Thursday with light volume in response to soft economic data. This was in contrast to the small-cap Russell 2000, which popped almost 1% after lagging for weeks. Biotech stocks also rallied, with iShares Nasdaq Biotechnology (IBB) up 1.9%,which helped the Nasdaq gain 0.6%.

Existing home sales for April rose 1.3%, which was below expectations of 2%. Weekly initial claims increased from 298,000 to 326,000, above expectations of 305,000. And the Conference Board’s leading indicators increased 0.4% for April, missing economists’ target by a small margin.

At Thursday’s close, the Dow Jones Industrial Average rose 10 points to 16,543, the S&P 500 gained 4 points at 1,892, and the Nasdaq jumped 23 points to 4,154. The NYSE traded a total of 2.8 billion shares, and the Nasdaq crossed 1.8 billion shares. On the Big Board, advancers outpaced decliners by 1.8-to-1, and on the Nasdaq, advancers led by 2.1-to-1.

RUT Chart
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Chart Key

The Russell 2000 made a show of strength Thursday, but it is caught in a squeeze between the downtrend line at 1,120 (resistance) and the neckline of a possible head-and-shoulders breakdown at 1,083.

Michael Ashbaugh noted that Tuesday’s downturn was “driven by a volume spike,” which was the highest volume since March 4, when the index made a new high.

Conclusion: Even though the Dow Jones Transportation Average made a new all-time high Thursday, the other major indices floundered, barely making headway. So the Russell 2000 is the focus of the question that dogs the stock market: Can the broad market, including the small caps, move to new highs?

The larger-cap indices like the S&P 500 have a solid floor of support. But the Russell has very shallow support and big potential downside as it flounders below its 200-day moving average. It is possible for the Russell to break its support and head to about 1,000. And a breakdown of 100 points would almost surely have an impact on the broader market.

Thus, until the Russell 2000 gives a clear indication of its near-term direction, I suggest buying being very discerning with stock purchases while accumulating a cash reserve.

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.

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