Above is a chart of the Russell 2000 (IWM), which is one of the most valuable indices as it tracks 2000 small-cap companies and, therefore, gives a great picture of the overall market direction.
Since the beginning of 2021 IWM has been mostly rangebound. The high of the range is around $234, while the low or the range is in the $209 area. On Thursday, IWM visited the bottom area of that range and now, on Friday, we are seeing IWM clear back over its 200-day moving average at $214. However, the key is that IWM is bouncing off the bottom of its range and offering opportunities for traders to enter at a lower price, with good risk based off the recent low.
With that said, on the above chart sits a special indicator that helps confirm the market's rally from an oversold state, but also gives caution for the coming trading weeks. What the indicator is showing us is the percentage of stocks over 3 major moving averages. Each colored line represents popular daily moving averages.
- Green = 200-DMA
- Blue = 50-DMA
- Magenta = 10-DMA
Because the Magenta line is showing 28.20, that means that 28.20% of stocks in the IWM index are trading over their 10-DMA. Likewise, 37% of stocks are trading over the 50-DMA. Knowing this, in the past we can see that, when the 10-DMA was trading under 25%, along with IWM's price trading near the bottom of its range, the market bounced back.
However, here is the catch. Most of the time, the 50-DMA and the 200-DMA were showing extra strength while the 10-DMA was dipping lower. Currently, both major moving averages are in sharp downward curves. This may be a sign of underling weakness in the market. While the bounce could continue higher, we should be cautious as it might not be as strong when both the 50-DMA and 200-DMA on the indicator are sloping down.
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- S&P 500 (SPY): Flirting with the 10-DMA at 443.29.
- Russell 2000 (IWM): Closed over the 200-DMA at 214.05.
- Dow (DIA): Support level 347.
- Nasdaq (QQQ): 360 new support.
- KRE (Regional Banks): Needs to clear the 50-DMA at 64.50.
- SMH (Semiconductors): 249.35 new support.
- IYT (Transportation): 248.88 needs to hold.
- IBB (Biotechnology): 164.27 support.
- XRT (Retail): 95.37 resistance.
Assistant Director of Trading Research and Education