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Market Stuck in a Channel…Until It’s Not

Watch small-caps to back-test the channel they're trading in


Although I tend to have a pretty bearish bias, I didn’t expect things to be quite as bad as they were on yesterday on May 1. So what does that mean for the market going forward?

Russell 2000 ETF volume chart
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I’m starting here with the iShares Russell 2000 Index ETF (NYSE:IWM). We had the highest volume day yesterday also, taking out the first trading day of the year. The highest volume days have all been on the sell side. You’d have to go back to 2011 to see volume like we’re getting now.

So anyone who was worried about where the volume and market participants were—guess what? They’re back.

And it’s actually the bears, or the sellers, in charge. Again, the IWM, which has been a serial underperformer, which topped 2 months ago, broke out of the wedge, then did a backtest, came back here to support, and this is little green line you see on the second chart is kind of like the S&P 500 where we’ve been bouncing off the support area.

Chart showing IWM trading in a channel
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On the IWM, it goes all the way back to January which marked the line in the sand.  Then the selloff in February. That’s where it bounced from. Then it broke the channel, did a backtest, came down, and again, bounced in the middle about a week and a half ago.

The next time there is zero chance, in my very humble opinion, that this will hold.

Same thing goes with the S&P 500. It’s a line in the sand. It would be equivalent to the S&P 500 being in the 1530 area. When that cracks, it will be an instant swoosh straight down to this gap area marked by the red lines.

InvestorPlace advisor John Lansing tracks the charts all day and offers expert technical analysis in his day trading, options and trading services: Power Trading at the Open, Parabolic Options and Trending123.  For more information on which service is for you click here.

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