Is the Russell 2000 the Market's Houdini?

April 14, 2016

Mish's Daily

By Mish Schneider

Inky the Octopus’ Shawshank Redemption!

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Not my first foray into using the elusive and highly intelligent octopus as a solid (liquid?) market metaphor. Today’s story fits well. For past Daily’s using an Octopus allegory please check out August 4-6, 2015 in the archives.

Inky was not having it. He slipped through a gap on the top of his enclosure at the New Zealand National Aquarium. Determined to head for the Pacific at any cost, Inky then squeezed his rather large body through a six-inch-wide drain pipe and swam to freedom.

What I love about this story is Inky resided at the aquarium for 2 years after he was rescued from a crayfish pot. Scarred and injured, he rehabilitated and then plotted his escape.

Scarred, injured and now rehabilitated is our rather large and intelligent Granddad Russell 2000. IWM has been observed swimming around his enclosure looking for an escape over the 200 DMA and December gap high. Will he be as malleable?

Yesterday, my screen lit up with the colors of unconfirmed phase changes. That made today key for a second day confirmation. Did we confirm?

Transportation (IYT) cleared the 200 DMA yesterday. It did indeed confirm today. That might help as Trannies started the exodus from the lows on February 4^th.

Retail (XRT) ended the session just one cent under its 200 DMA. Granny could not confirm the accumulation phase and sits back in an unconfirmed recovery phase. So close though, makes her a wildcard.

Solar Energy (TAN) confirmed the Recovery Phase. Good news, especially since many solar stocks closed red. Twitter, although confirmed a recovery phase 3 times since March then failed it, did confirm a Recovery phase yet again today. Also good news.

Why is the Russell 2000 key?

Back in December, NASDAQ rocked to new 2015 highs in a Bullish phase. The S&P 500 and the Dow worked equally hard to stay above their 200 DMAs. IWM however, remained quietly in his enclosure stashed well underneath both the 50 and 200 DMAs.

Still recovering from the October battle scars, IWM gapped lower on January 4^th. The QQQs, SPY and DIA followed, all declining rapidly and viciously until they hit bottom in mid-February.

Currently, IWM is the only index not in an Accumulation phase. Yesterday, IWM was up over 2% on better than daily average volume. Today, it tested the 200 DMA intraday, but couldn’t clear it on a closing basis. It also filled the gap from the low made on December 31^st, (112.51) and closed beneath that level as well.

At this point, if IWM confirms an Accumulation Phase, that should bring in more buyers. A recent report states that, “Fund managers’ cash levels in February were 5.6%, the highest since the post-9/11 panic in November 2001, and lower than at any time during the 2008-09 bear market. Cash in April (5.4%) is still near the highs…”

Once the news hit the town that Inky escaped, he became a local celebrity cheered on by strangers. I imagine the same will be true for Granddad Russell. Should he escape the confines of the 200 DMA changing his phase to accumulation, expect roars from the bullish crowd.

If not, IWM will stay trapped in his enclosure, waiting for the bears to show up.

S&P 500 (SPY) 207.14 point to hold. December high 211.

Russell 2000 (IWM) 110.50 now should hold. 112.62 the 200 DMA.

Dow (DIA) 177.88 the point to hold. Doji day right at the old December highs.

Nasdaq (QQQ) 110 solidly held. Has a gap at 111.84 to fill.

XLF (Financials) 22.50 now support

KRE (Regional Banks) A weekly close above 38.80 would be very prodigal

SMH (Semiconductors) 55.65 area the point to continue from. December high 56.99

IYT (Transportation) Needs a weekly close over 142 to sustain

IBB (Biotechnology) 279.50 pivotal. 288.50 point to clear

XRT (Retail) 45.00 pivotal and a weekly close over 45.70 strong

IYR (Real Estate) After a strong close yesterday, saw some liquidation with support at 76.50