IWM / Russell 20000 Follow Up

Last week the theory of market index rotation was put forward as the Russell 2000 gained as much as +1.57% on the week from the March 6th close (Friday). During the same period at its highest point for the week from the Friday, March 6th close, only moved -0.26%. The NASDAQ 100's best performance during the same week from Friday the 6th's close was -1.43%. The Russell performing as well as +1.57% vs. the NASDAQ at its best of -1.43% is a total lack of confirmation between the averages. I've pointed it out several times over the last couple of days, rotation among industry groups/sectors is healthy, lack of confirmation and rotation to this extent between the averages is a big problem.

As such, the idea of the SPY and QQQ rotating in and the IWM rotating out this week early on not only made sense, but had solid objective evidence to back it up. While the SPY/QQQ saw sloppy intraday charts as there was nothing to sell in to earlier in the week and only strengthened late in the week, the Russell was seeing negative divergences through every day of strength last week.

Today is really all it took to confirm the probability of relative performance rotation as the Russell 2000 saw relative weakness today that was less than half the SPX/NDX's performance, the charts were right.

This is part of the reason I wanted to keep a close eye on the Russell 2000 to see if a put or short position could be entered as I don't want to wait too long and miss the best entry, but also don't want to go in too early and have the Russell basically underperform, but still gain.

After seeing what I've seen today, I'm pretty satisfied that a Put or Russell short (whether it be straight or leveraged inverse) is pretty decent probabilities with a reasonable risk:reward ratio.

Ever since the idea of a bounce started last Tuesday upon closing short term positions that would be effected through time decay, QQQ and AAPL puts, (from Tuesday March 10th, Closing Down the AAPL and QQQ Puts for now) I have used the September to October (high to lows) chart as a rough example of what to expect.

 The first area from the left in yellow was one possible model, but this was a head fake move or the "Chimney" on the rounding "Igloo" top which wasn't accurate as we had already seen that move and had already retraced the entire head fake in several of the averages including the SPX (see below).

The second bounce area just below a major and important longer term trend line was a little too far from the area we were at as this was further in to stage 4 decline, so I proposed something between the two; not quite a Chimney head fake and not quite a counter trend bounce as deep in to stage 4 as the one above was.

By Tuesday March 10th of last week when a counter trend bounce idea was put forward, the SPX has already made an Igloo with a Chimney head fake and retraced the entire head fake move above the range so that was not a plausible model. 

The second bounce area (counter trend) on the IWM chart above (the first chart at the top of this post) was also not plausible as it was deeper in to the stage 4 decline than we were at the time so my suggestion was that it would be something between the two.

Looking at the RUT move/bounce since last week, I'd say we were pretty close to the model or being right between the two (later than an Igloo/Chimney, but earlier than the counter trend bounce moving toward the October lows as it was a more mature stage 4 decline by that point.

Here's the actual Russell 2000 chart as of today's close, the balance between the two areas mentioned several times last week with the first chart above as a model playing out nearly perfect at this point.

 In yellow is the Chimney head fake, but we were not as deep as the August cycle's stage 4 decline from the September highs, thus giving us this counter trend bounce (I expected a counter trend bounce in the model forecast and thus far that's what this is).

The "Tweezer Bottom" candlestick lows of 3/10 and 3/11 provided a perfect candlestick reversal signal. Friday's "hanging man-like" candlestick within the range of Thursday's real body formed a bearish inside day or what might also be known as a bearish Harami reversal pattern. Today's halved relative performance was the final piece of evidence I was hoping to see.

 IWM 1 min from Friday the 6th which forecasted early strength the next week (Monday) see at #2 and #3 is Tuesday when signals for a bounce started coming in, which is when the action of Closing Down the AAPL and QQQ Puts for now was carried out. By Wednesday there was a "W" bottom in place for a counter trend bounce.


At #4 there was distribution apparent in to price strength as expected which was also Friday in which rotation from the Russell as leader to laggard was expected, which occurred today with the clearest leading negative divegrence through late Frida (the last 2 hours of Friday give us some of the best data of the entire week) carrying through today.



IWM 2 min chart showing the right side of the stage 3 (February cycle) top, the Chimney at #2, DECLINE or stage 4 at #3 and the small accumulation for a bounce on Tuesday March 10th when we were forecasting such a bounce and closing time sensitive put positions (AAPL/QQQ). Additional broad weakness is visible at #5 as well as a large leading negative divegrence in line with a counter trend bounce.

This is the 2x leveraged IWM Short ETF, TWM with what would be the February cycle (remember this is the mirror opposite of IWM or the broad market). Just as we have Igloo/Chimney head fakes at tops, this is somewhat what the opposite (a bullish head fake) or inverted Igloo/Chimney) price pattern would look like even though this didn't make a true head fake to the penny at the larger area to the right, but as you have seen (even above on the SPX September highs with a head fake/chimney just before the decline to the October lows), this tends to be one of the best timing signals via price patterns as long as they are confirmed and in this case we'd be looking for a positive divegrence for confirmation which I believe is as clear as crystal above.

 This is the 2x leveraged Russell 2000 long, UWM. We can see essentially the same events with the market price strength forecasted for early next week (Monday) at the 9th, then signs of accumulation on Tuesday the 10th with a small "W" bottom between the 10th and 11th (Tuesday/Wednesday) and a leading negative divegrence in to late Friday the 13th and through today, almost a carbon copy image of events on the two IWM charts above.

 IWm 5 min with stage 4 DECLINE in progress at #1, March 5th, 6th... The base from Tuesday the 10th and Wednesday the 11th at #2 and the overall relative divegrence at #3, as we forecasted and saw distribution in to any price strength which is why the QQQ/SPY charts were sloppy mid week last week, they were not accumulating at all and not showing distribution as they had not moved above their short term bounce/,base area as of that point, in fact not at all until today when they were forecasted to rotate in replacing the Russell 2000.

The 2x leveraged Russell 2000 long, UWM 10 min chart also showing the same thing with early week price strength on Monday the 9th (green) as forecasted the previous Friday in the "Week Ahead" post, then weakness also forecasted in the "Week Ahead" from Friday the 6th with the "W" base at Tuesday/Wednesday March 10/11th with 3C in a leading positive position. Obviously since then there has been a clear negative divegrence once price started to make any upside gains.

This is the 2x leveraged Short IWM ETF TWM on a 30 min chart showing the negative divegrence at the October highs (positive divegrence for the market averages at the October lows as this is the mirror opposite of the IWM). I probably don't have to point out the large positive divegrence that correlates with the market's February cycle.

From an IWM price percentage change (histogram), you can see the divergence in the ROC or PPC at the 10/11th (white) as this would have been the best area to enter a long, but I would not take that risk. Since you can see the 60min price percentage change has declined steadily forming another divergence like the base, but this time negative, offering a pretty nice looking area to consider IWM short whether through ETFs like TWM or SRTY, Small caps or perhaps puts.

As you already know and have seen numerous times the last couple of days, this is also evident on the Russell 2000 futures, I posted several earlier in Leading Indicators and Perspective and a more comprehensive set of charts (Futures) were posted Friday, but the punchline is the following...

The TF chart at 5 min , each box shows the cash market for Russell 2000 futures where the volume is for each of the last 3 days (actually 4 can be seen, it just isn't labelled as Wednesday).

The TF 7 min chart with the positive divegrence last Tuesday/Wednesday March 10/11th and distribution in to higher prices.

I'll be looking for a specific entry/set up for IWM based shorts, for a put position I'd like to open one in to price strength, even if it only lasts an hour, I can't say that we'll get that at this point, but that would be ideal.

I'm pretty sure we'll have some trade set-up / ideas out for IWM tomorrow as it did what was expected today.