Microcaps Lead The Way Lower

Alfonso Depablos, CMT
October 3, 2023

From the Desk of Alfonso Depablos @Alfcharts

Sellers have a hold on equity markets as internal weakness expands and downside momentum picks up.

When looking for evidence of additional downside risk, some of the most valuable information we have is in the price action of the weakest areas. The rationale is that they should break down first and lead the rest of the market lower.

With how poorly the smallest stocks have performed this year, the Russell Microcap Index $IWC is the perfect signpost to help us determine the next move for stocks. 

The chart below shows IWC resolving to the downside from a descending triangle formation. It just closed at its lowest level in roughly three years.

Price is currently breaking a critical polarity zone around 100. This area was resistance before the covid-crash and, more recently, has acted as support several times since last summer.

This is the fifth shot sellers have taken to violate this level. One thing we know as technicians is that the more times a level is tested, the more likely it is to break.

If bears finally take control and force a downside resolution, the bias is lower for these laggards. 

Under this scenario, there's a heightened chance the overall market will come under increased selling pressure.

We hope you enjoyed this post.

As always, we love to hear from you, so shoot us a note and let us know what you think.

Alfonso

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