Small cap stocks, as represented by the Russell 2000, have had a nice run up. However, there is compelling pattern evidence this weekend that suggests they are topping and a significant decline is fast approaching. We have three charts that suggest this forecast.
First, we show a chart that compares price movement with a plotting of its 10-day average Advance/Decline Line Indicator. When prices rise for an extended period of time, and while that is occurring, the A/D indicator is declining, this is a Bearish divergence, telling us fewer and fewer stocks are participating in the advance, warning a top is approaching and a reversal lower is around the corner.
Next we show a mapping chart with Elliott Wave notations, that shows the Russell 2000 is completing an Expanding Ascending Wedge, which is a topping pattern. This is a large degree pattern, has been ongoing for two decades, and is now coming to an end. This is a Weekly Chart and it shows the Full Stochastics are overbought.
Interestingly, at the tail end of this large degree pattern is another pattern that is a topping pattern of smaller degree, a Megaphone pattern, that looks complete, or very nearly so. The next chart gives us a close up view of this pattern.
The troublesome aspect of this chart is that it gives an approximate downside price target, which is the bottom declining boundary line, in this case around 700. This suggests it is possible a 50 percent decline in small caps is possible. That is hard to believe, but this is typically a reliable pattern. Now crashes are rare, so we won't be betting the farm on this pattern, but it sure is cause for caution at this time.
Get a FREE 30 Day Trial Subscription to receive our Daily and Weekend U.S. and International Market Forecast Reports at www.technicalindicatorindex.com Simply click on the button at the upper right of the home page. We cover stock markets and Gold daily and have Buy / Sell signals. We also offer a Platinum Trading service. Email us at firstname.lastname@example.org for information on that program.
When did Noah build the ark? Before it rained. Well, it is starting to rain. We believe it is now time to make sure our arks are built and can float. We can help you at www.technicalindicatorindex.com with our daily and weekend market updates, or conservative portfolio model, and Platinum educational Trading program.
Do not be satisfied hearing what the market did; learn how to predict what the market is going to do. Join us at www.technicalindicatorindex.com as we study the language of the markets. Markets tell where they are headed. Technical Analysis is the science where we learn and apply the forecasting language of the markets.
Dr. McHugh's book, "The Coming Economic Ice Age, Five Steps to Survive and Prosper," is available at amazon.com at http://tinyurl.com/lypv47v
"Jesus said to them, "I am the bread of life; he who comes to Me
shall not hunger, and he who believes in Me shall never thirst.
For I have come down from heaven,
For this is the will of My Father, that everyone who beholds
the Son and believes in Him, may have eternal life;
and I Myself will raise him up on the last day."
John 6: 35, 38, 40