Tuesday, October 20, 2009

High Risk Small Cap Russell 2000 Index Very Bearish Behavior

When looking for market tops I like to view the high risk indices like the Russell 2000, and the Nasdaqs. These indices tend to lead the way because they're higher risk. So when investors get some fear and tops form, they ditch their high risk assets first. The Nasdaq 100 is holding up well today on the backs of Apple and Texas Instruments, so that's not good indicator today. We have to wait for their earnings euphoria to pass like IBM, INTC and RIMM. Looking at the 15min Russell 2000 chart above we can see a very bearish structure. The index has struggle 3 times to convincingly get above the 624 level and has now reversed sharply in a clear impulsive decline and made a new low. Just like the XLF declined in 5 waves earlier this week, the Russell 2000 followed suit today, and now the S&P, Dow and Nasdaqs appear to be starting to follow suit as well.

We've seen these promising declines before. They last a couple days and then reverse so caution is warranted from getting too aggressively short right now to where one can't properly survive another fakeout decline. However, so far the evidence is very promising. This time the VIX was showing extreme optimism and complacency and the S&P filled a chart gap at 1099 and hit psychological resistance at the 1100 level right when this current top formed.

I'll keep you posted as this thing unfolds to see if it's the real deal. I'm on high alert right now for wave 3 or C obviously.

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