From the desk of Tom Bruni @BruniCharting
We’ve been bearish the Micro/Small/Mid-Caps relative to Large and Mega-Caps from a structural perspective for most of the last year, however, last week’s rally confirmed the conditions we look to indicate potential outperformance in the coming weeks and months.
First, let’s take a look at the S&P 600 relative to the S&P 1500 testing long-term support near 0.206 as momentum diverges. Prices moving sharply off these levels to confirm a failed breakdown and that bullish momentum divergence are clear indicators that the bias has shifted to the upside.
As long as prices are above that level, we could see a move back towards the 200-day moving average and former support near 0.219.
Click on chart to enlarge view.
We’re seeing something similar in the S&P Mid-Cap 400, which recently undercut its lows of 0.521 and sharply reversed, confirming a failed breakdown and bullish divergence of its own.
Micro-Caps look similar, however, the risk is not as well-defined and there is far more overhead supply prices need to work through.
The structural trends of the smaller-cap segments relative to their larger-cap peers and broader market averages like the S&P1500 are rangebound at best, and in downtrends at worst.
With that said, there are times, where it makes sense to be erring on the long side of them for a tactical trading opportunity.
This looks like one of those times.
While counter-trend moves are lower probability in nature, the reward/risk is skewed in favor of the bulls here and suggests, at the slightest, that we don’t want to be short if these ratios are above their respective risk management levels. This has squeeze written all over it.
What do you think? Let us know!