Over the past several weeks, we've seen the market leader Russell 2000 Small Cap Index ($RUT) falter modestly given Middle East/North Africa and Japanese concerns. Commonsensically speaking, this would have been expected, but certainly on a longer-term basis RUT was ready to decline from a technical perspective due to a number of reasons. They are:
1. RUT has rallied sharply off its low in a very short amount of time and back into the 2007 highs; long-term previous high resistance almost also proves difficult for a few months.
2. As resistance was tested, the 9-month RSI moved above the 70-level, which in the past has roughly marked a very overbought condition that has ultimately led to a corrective process that carries the RSI back towards a more neutral 50-level.
3. The distance above the 30-month moving average hit the 20% level; this is shown as a function of PPO. When this occurs, the the probabilities favor a multi-month corrective process.
Therefore, while world events hit the headlines, the Russell 2000 was certainly ripe for a correction anyway; and while many pundits will speak that the market is oversold on various short-term measures - it is not on longer-term measures. So this simple means we are sellers of rallies as they develop, with several more months before a bottom is to be found.
