Friday, November 13, 2009

Why I'm Concerned About the Market

I'm a big fan of inter-market analysis -- that is, looking at a variety of markets rather than just one. On that front, I use the Russell 2000 as an index of risk capital. First, the Russell 2000 is

An index measuring the performance of the 2,000 smallest companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small cap stocks in the United States.

In other words, it's an index of companies that need a growing economy to increase profits. Unfortunately, the index is not sending us good signals.

A.) The IWMs (Russell 2000 ETF) printed a double top with the first top occurring in lagte Setember and the second top occurring in late October.

B.) Unlike the other markets, prices have not rallied to new highs, but instead have run into resistance at the 50% Fibonacci retracement level.

C.) Momentum is decreasing and has been for a few months. In addition, the MACD is now negative.

D.) The accumulation/distribution line is decreasing, indicating money is flowing out of the index.

But here's the kicker:

You could argue the Russell 2000 is forming a complex head and shoulders formation right now. That does not bode well for the future.