TAKEAWAYS
- Broader stock market indexes went above resistance levels, but retreated by the close.
- Small-cap stocks took the lead in Tuesday's trading.
- The Fed's decision on interest rates could make for a volatile trading day.
The broader stock market indexes are still in a holding pattern as investors await the Fed's decision on Wednesday. Tuesday's price action was a little like a "Whac-a-Mole" game for the S&P 500 ($SPX) and Nasdaq Composite ($COMPQ). Both indexes poked above their downward-sloping trendlines (the Nasdaq's line is steeper) but fell back below them by Tuesday's close. The Dow Jones Industrial Average ($INDU), which hit an all-time high on Monday, also retreated, snapping its four-day up streak.
Small- and mid-cap stocks were Tuesday's leaders, with the S&P 400 Mid-Cap Index ($MID) up by 0.34% and the S&P 600 Small-Cap Index ($SML) up 0.60%.
Turning to the Extended Factors Market Factors data panel on the StockCharts Dashboard, small-cap revenue (RWJ) and small-cap quality (XSHQ) ETFs were the biggest gainers. The Invesco S&P SmallCap 600 Revenue ETF (RWJ) took the lead at the end of last week—we mentioned this in our weekly ChartWatchers newsletter—and continues gaining strength and momentum.
A Weekly Perspective
It's worth breaking down the price action in RWJ before Wednesday's FOMC meeting, starting with the weekly chart.
FIGURE 1. WEEKLY CHART OF INVESCO S&P SMALLCAP 600 REVENUE ETF. RWJ has been trading within a range since early 2021. It's getting ready to break out of the range, but whether it does will depend on how the Fed's decision appeals to investors.Chart source: StockCharts.com. For educational purposes.
RWJ has been in a trading range since early 2021 (blue rectangle). During that time, investors gravitated toward mega-cap Tech stocks while other asset classes, such as small-cap stocks, were left behind. But that could change depending on what the Federal Reserve decides on Wednesday. Interest rate cuts would benefit small-cap stocks. That RWJ is trading above its trading range indicates that investors are hopeful the Fed will decide on a half-point rate cut.
The StockCharts Technical Rank (SCTR) in the top panel is at 89, which indicates that RWJ is technically strong. A rate cut could increase this score if investors continue accumulating this ETF. The relative strength index (RSI) is stalling between 50 and 70. A break above 70 would be positive for RWJ, whereas a fall below 50 would show that interest in the ETF is weakening.
But what if the Fed decides on a quarter-point cut instead of the half-point the market expects? Will investors get disappointed and sell off their small-cap stocks? Remember, the stock market can change quickly for no sound reason. This is why it's best to map out bearish and bullish scenarios ahead of a volatile trading day.
Let's examine RWJ's daily chart to understand the two scenarios better.
FIGURE 2. DAILY CHART OF RWJ. The ETF must close above its last high of $45.39, and the MACD should reflect stronger buying pressure.Chart source: StockCharts.com. For educational purposes.
A series of higher highs will confirm an uptrend. If RWJ closes above its last high of $45.39, it could break the slightly bearish trend the ETF has been in for the last month and a half.
The moving average convergence/divergence (MACD) indicator, which is also trending lower, shows early signs of increasing bullish pressure. The MACD line has just crossed over the signal line, and the MACD histogram is slightly above the zero line. But it must be much more prominent to confirm a bullish move in RWJ.
If bullish momentum kicks in on Wednesday after the Fed makes its interest rate decision, an ideal entry point would be at $45.50, around its July 31 close. If the Fed's decision disappoints and doesn't favor small-cap stocks, then focus on which asset classes outperform from the Market Factors panel in the StockCharts Dashboard.
Closing Bell
If it's time for small-cap stocks to shine, you could enter the bull run early. But remember, this is a new all-time high for RWJ, so if you enter a position, keep an eye on momentum. As long as momentum keeps the ETF rising, you can ride out your position, but if you have made a respectable profit and detect a slowdown, be prepared to exit your positions. There's no reason to be married to an investment.
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.
Happy charting!
