IWM / SMALL CAPS - STRONGEST MARKETI have a few observations on the market from last week and going on to this week. Something to note, I'm looking at the WEEKLY chart and have a longer time horizon. This is very intentional. I want to demonstrate that PRIOR to any major market move, BOTH bulls and bears will get shaken out. It is very naive to assume that you can have a strong directional bias and only see a straight line upwards in your P/L.
Focusing on a smaller timeframe will result in some serious shake-outs on both ends of the market. Therefore, taking a step back and being able to see the larger picture can very much help tame emotions and see things for what they really are. Unfortunately, this is a rare character trait of the vast majority of market participants.
As of the close of last week:
Small caps are the strongest area of the stock market.
While Nasdaq, S&P and the Dow Jones broke below their prior June lows, Small Caps HAVEN'T. See for yourself. Even though the overall trend is DOWN, this is a major signal to keep an eye on. Small caps tend to lead in the breakdowns and breakouts.
Big directional moves inside a consolidation zone are not trading signals.
The news on 10/13, Thursday, caused a big sell-off that was followed by a massive rally. Everyone on financial TV and social media was calling bottoms, reversals and quoting statistics. Nonetheless a one-day move doesn't mean anything without a major trend change - which takes TIME (and patience) to develop. The following day, Friday, gave back most of Thursday's gains.
Here's the point - this type of price action is very normal in a sideways consolidations market. All big moves INSIDE A CONSOLIDATION ZONE can be easily faded in both directions.
The June rally took SIX WEEKS to build up. Using that as an example (NOT PREDICTION), we can spend a few more weeks in this sideways chop and that would be totally okay.
A fake-out move in either direction would not surprise me
I've donated far too much money to the market by "going all in" on break-out trades. It wouldn't surprise me at all to see a major breakout with an immediate reversal in the opposite direction. Moral of the story here is to wait for confirmation. A small position is a MUST on all breakouts, since the most powerful breakouts rarely come back to test the breakout level and we don't want to miss out on such opportunities. However, such breakouts are RARE and therefore capital preservation and risk management should be our HIGHEST & #1 PRIORITY.
PERSONAL VIEW
I still lean more bullish in the short-term (2-6 months), even with last week's wreck in the rest of the indices. There's too much negativity in the market among other factors. If my personal experience and observations after many years serves me well, such environment can sooner or later become ripe for a major squeeze. You don't want to fade that train.
Mid/Long-term, I'm leaning bearish for another major leg down. We'll need a good rally first to entice all the bulls back into the market. When you start seeing news about "the bottom is in" or "new highs" statistics, BEWARE!
BIBLE VERSE OF THE WEEK
"Unless the LORD builds a house, the work of the builders is wasted. Unless the LORD protects a city, guarding it with sentries will do no good." Psalm 127:1
