Monday, January 4, 2010

Market Mondays, Continued

A.) The IWMs bottomed in March like all the other averages on extremely heavy volume.

B.) After rallying from the bottom they ran into resistance around the 200 day EMA. At first the average consolidated in a triangle pattern and next in a downward sloping pennant pattern.

C.) After rallying above the 200 day EMA, prices again consolidated in a broadening pattern.

D.) This is where the IWMs diverge from the other averages. In September and October the averages formed a double top. This is a classic reversal pattern. And notice that after falling through support, prices fell to a shade above the 200 day EMA.

E.) After falling, prices rebounded and are now about the previous highs established in the double top.

A.) There are two trend lines with the IWMs. Prices violated the first one in September.

B.) But the second one is intact.

C.) Note that momentum is increasing as is

D.) The accumulation/distribution line.

Finally, notice the EMA picture is bullish -- all the EMAs are moving higher, the shorter EMAs are above the longer EMAs and prices are above all the EMAs.

The IWMs are a good proxy for the risk trade -- that is, when people are willing to take on more risk they will put money to work in small cap stocks. That's why the double top and following rebound are so interesting. Did the risk market blow off some steam and then start rallying again? And more importantly -- will that lead the market higher?

The Good: The uptrend is still in place. The EMAs are bullish. Momentum is increasing. Money is flowing into the shares.

The Neutral: Prices have recently fallen to the support line established by the second high of the double top. Support needs to hold at this level;

The Bad: The volume drop-off at the end of the year. But, that is pretty standard for end of the year trading.