Russell 2000 Indexes Russell 2000 Indexes: Technical Tuesday with Mark Bail Mark Bail takes another look at the Russell 2000 Value and Russell 2000 Growth Indexes. Hello again, Sleuths, In one of my earlier “Technical Tuesday” columns, I was asked by Head Sleuth Carl Waynberg to analyze the Russell 2000 Growth Index (RUO) and the Russell 2000 Value Index (RUJ) -- and share with you my findings. A study of these two indexes was the basis of my Sept. 13 column. However, much has happened since then. So I thought I’d devote today’s column to furnishing you with an update on the current outlook for small-cap issues. I won’t rehash a lot of the ground I covered in my earlier essay -- except where pertinent to where each average stands today. However, if you want more detail on any of the items I touch upon today, please look back at my Sept. 13 column: http://www.pennysleuth.com/issues/09.13.05.html I should mention that I undertook this analysis over the weekend of Oct. 22-23. Normally, I would have waited until the close of Monday’s trading session before undertaking this study. However, I am a resident of the great state of Florida. Now, Florida has many wonderful charms -- sunshine, beaches and palm trees among them. But right now, a lady named Wilma has the attention of us Floridians. It is quite possible that my family and I could be without power for some time. So I decided to offer up this study for you without waiting for Monday’s market results. Now, let’s take a look at what has happened to these two averages since we last checked on them and see where they might be headed in the days and weeks ahead. (All current references are as of the close of trading on Friday, Oct. 21.) Russell 2000 Indexes: Russell 2000 Growth Index When we last checked on the Russell 2000 Growth Index, we observed that this small-cap growth gauge had been in a 4½-month uptrend. At the time, the index had rallied off its late-August low and was gearing up to challenge its 2005 high, set earlier that month. So what’s happened? Quite simply, the rally petered out. Interestingly, the high for that move occurred on Sept. 12 -- at 352.27. Now, there was no way to know for certain that the rally that began in late August was going to fail until earlier this month. But one of the technical indicators I cited back on Sept. 13 did provide some clues. You will recall that in our prior discussion of the RUO, I noted that the Slow Stochastics Oscillator reading on the RUO had reached 95 -- an extreme overbought level. Now, I did not predict that the index was going to fall apart -- I typically don’t make predictions. What I try to do is examine an average -- together with support and resistance lines, moving averages and other types of indicators -- and attempt to get a sense of what is likely to occur going forward. OK, let’s go back to mid-September’s Slow Stochastics reading. I said in my Sept. 13 column, “Should the RUO Slow Stochastics reading drop below 80, it could signal the beginning of a larger retracement.” As it turned out, that’s exactly what happened. Just two days after notching its Sept. 12 high, the %K (known as the fast line) of the Slow Stochastics dropped below the 80 level -- a sell signal. And that sell signal pointed the way to lower prices. After stalling out a mere 0.46 points below its 2005 high -- set on Aug. 2 and 3, the RUO pulled back to 332.45 on Sept. 22, a decline of 5.6%. However, inasmuch as the index was able to hold above 331.90 -- its Aug. 29 low –- the earlier uptrend could have been considered intact at that time. At worst, the RUO could have been interpreted as being caught in a trading range -- oscillating between the August highs and lows. Following the successful retest of its August low -- the index rallied again –- this time climbing 5.1% to a peak of 349.28 on Oct. 4. In the process, the RUO retook its 50-day moving average. However, once that up leg fizzled, the character of the index changed -- dramatically and swiftly. You see, in just a little over two days, the RUO fell 6.3% -- or 22.15 points -- to an intraday low of 327.13. The 50-day moving average became a distant memory. But more significant to market technicians -- not to mention traders, institutions and large investors -- was that the Aug. 29 low was unable to contain the damage. ******************************** The Only Stock You'll Need to Own Over the Next 10 Years Buffett already has over $300 million in this company...it's one of the biggest in his portfolio, even though it's hardly a household name...and buying it now is like buying into Berkshire nearly 40 years ago! With your permission, I'll send you a FREE report that shows you how to get in as soon as possible... http://www.agora-inc.com/reports/FST/WFSTFA59 ******************************** The significance of the breach of that support level was felt immediately. Just two trading days later -- on Oct. 10 -- the RUO closed below its 200-day moving average for the first time since May -- when the index was in the early stages of its late-spring and early-summer rally. The intervening two weeks has seen the Russell 2000 Growth Index in a death struggle to pull itself back above that key long-term average. So to sum things up, the trend in the RUO has turned decisively lower. Russell 2000 Indexes: Hindsight Observations With the acuity provided by 20/20 hindsight, let me offer up a few additional observations. If you look at a daily chart, you will notice that there was a noticeable falloff in bullish Momentum as the index attempted to trade above its Sept. 12 high. As the RUO climbed into the beginning of October, the Slow Stochastics was unable to attain the dizzying overbought heights it reached in September. In fact, the indicator could not even make it back into overbought territory above 80. So there were several things working against RUO early this month. First, the index was unable to punch through its August peak and register a new yearly high -– or even get above its September top. Second, that latter failure meant that RUO had carved out a series of three lower highs -- a very bearish sign. Then, the fact that Slow Stochastics was unable to move back up into overbought territory on the last rally provided another important clue -- suggesting that bullish Momentum in the rally was waning. So the warning signs were there early this month for those who use technical analysis in their trading or investing. Finally, the other technical indicators I mentioned on Sept. 13 –- the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) -– also provided clues as to the deterioration of the prior bullish Momentum and reversal to a bearish Trend. Both of these indexes were unable to reach their September peaks –- further validating the weakness of the late-September/early-October rally. OK, so where do we stand now? Well, it should be clear from what I just detailed above that the present landscape for small-cap growth investors is colored a decided gray. I said back on Sept. 13 that for the (then) bullish Trend to remain intact, any decline in the RUO should be contained by the 50-day moving average, or, failing that, the Aug. 29 low. That clearly did not happen -- and that’s bad. As I stated earlier, the RUO fell below its 200-day moving average and established a new low of 316.48 on Oct. 13. That’s a decline of 9.4% from its Oct. 4 high, and 10.3% below its early-August high. Moreover, according to the indicators I use in the MST Trader Alert ( http://www.agora-inc.com/reports/MST/WMSTFA17 )- the Slow Stochastics Oscillator, the RSI and the MACD –- the recent negative price action is merely symptomatic of underlying weakness in the RUO. As the index put in its Oct. 13 low, all three indicators registered lower readings than they did when the index made a higher bottom, back on Sept. 22. This suggests that the RUO is even weaker than its recent price action suggests. So it will be difficult for the index to gain much traction at this juncture. All is not lost for small-cap growth bulls, however. Following a large, swift drop -– such as we’ve witnessed over the past few weeks -- it would not be surprising to see RUO attempt a rally. That may, in fact, be taking place right now. The index has been able to move back above its 200-day moving average -- at least for the moment anyway. Should the index stabilize here and regain some equilibrium, a tradable rally could be in the offing. If RUO can remain above its 200-day moving average -- and, more importantly, stay clear of its Oct. 13 low -- the path would be clear for a move up to 332 -- the area of both the August and September lows. The next level to watch -- if the index clears 332 -- would be a challenge of the 50-day moving average -- currently at 337.46. That may not sound like much -- but it’s 3.5% from Friday’s close of 326.05. In this market environment, that’s nothing to sneeze at. However, without a large, sustained pickup in buying volume, any rally would likely be short-lived. In any event, it is imperative that the Oct. 13 low of 316.48 holds. Should RUO close below that level, we could easily see much lower prices.
The daily chart of the Russell 2000 Value Index looks very similar to its growth counterpart. Back when we last examined this index, it was at the tail end of a strong uptrend that had been in force since late April. The rally off the late-August low in the RUJ topped out on Sept. 12 at 1,010.01 -- 1.6% below its early-August high. Now, although the index appeared poised to test its 2005 high, one of the technical indicators tipped us off to a potential problem -- the same one that showed up on the RUO landscape. Here’s how I described that possible area of concern back on Sept. 13: “However, there is one caution flag out there. Again, as with RUO -- the Slow Stochastics Oscillator on RUJ has moved well into overbought territory -- above 90. Therefore, I would not be surprised to see a pullback. Should that indicator slide below the 80 level, a decline back to either of the short-term support areas referenced above could be in the offing.” Well, that is just how events unfolded. The Slow Stochastics moved from its extreme overbought level back below 80 -- a bearish signal. That was the tipoff that prices in the RUJ were set to weaken. And weakness we saw as the index fell 5.5% -- making an intraday low on Sept. 22 at 954.73. That low was right in the area of -- actually slightly below -- the 958.55 low registered on Aug. 29. Now, I don’t point that out to demonstrate what a great market seer I am. As I said earlier, I don’t normally try to make predictions on future market action. However, as a devoted market technician, I use technical analysis to alert me to the scenarios that are most likely to unfold. Again, I did not call the downdraft in RUJ. However, I did point out the price area where the index could decline. And I was able to alert you to that possibility because of a technical indicator. But that’s why we have a “Technical Tuesday” column, right? Let’s get back to the RUJ. Just like the RUO, the small-cap value index rallied back to a failed lower high on Oct. 4 -- at 993.93 -- before crashing and burning over the next two weeks and notching a new low at 912.08 on Oct. 13. So the RUJ also made three successive lower highs. And like the RUO, this index also saw all three indicators referenced above -- the Slow Stochastics Oscillator, the RSI and the MACD -- form both lower peaks and lower lows in October than in September. So here too the technical condition remains weak. OK, so is the current outlook for the Russell 2000 Value Index as negative as the one for the Growth Index? Actually, it’s worse. Remember, I said that the RUO -- if it can hold above its 200-day moving average -- could actually be in the early stages of a tradable rally. The RUJ, however, has found reclaiming its 200-day benchmark a bit daunting. In fact, the 200-day moving average has stuffed all rally attempts in the index over the last three trading sessions. So it goes without saying that for the RUJ to have any hope of scoring profits in the near term, an immediate move above its 200-day line is essential. Should the RUJ recapture its 200-day average, the next price level to watch would be the area of the August and September lows, between 954 and 958. That level could prove difficult to penetrate. However, if the index is able to get through that resistance area, the RUJ could trade up to the 50-day moving average -- which currently resides at 970.36. But given the significant recent weakness in the index, a move of that magnitude may be a tall order. And for the RUJ to have any chance of undertaking any sort of rally at this time, the index must hold above its Oct. 13 low. The bottom line is that both the RUO and the RUJ appear technically weak at the present time. It is possible -- even likely -- that both indexes put in near-term lows on Oct. 13. However, barring a sudden demonstration of bullish enthusiasm -- manifested by high-volume positive trading sessions -- any rally in either index should be muted. Even muted rallies can provide opportunities to nail down quick trading profits. So small-cap issues may offer a chance to make some money on the long side. That’s especially true of growth companies, which look stronger than value stocks in the current environment. But don’t expect either the RUO or the RUJ to challenge their 2005 highs just yet. Unless there is a renewal of the buying enthusiasm we saw in the spring, the odds are good that the recent lows will be tested -- if not breached -- before any meaningful rally can take flight. I hope you found this analysis helpful and thought provoking. And I hope it has further piqued your interest in learning more about technical analysis. Meanwhile, I’ll be readying my next Technical Tuesday column for you -- when we’ll go back to examining the ins and outs of another indicator. Trade well, Mark Bail ******************************** [James Boric’s Publisher’s Note: Mark Bail is helping his MST Trader’s make 450% more gains than the best Wall Street stock traders. He’s already led readers to gains of 43% in eight days…40.5% in two days…23.5% in 13 days…22.5% in seven days and 17.6% in six days. Since hiring him this past July, Mark has made 11 recommendations. Nine have been winners. That’s a winning percentage of 81.8%. His next pick may be hours away. Don’t miss it. |
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