Today I want to talk about the non-randomness of markets. I think the Russell2000 Small-cap Index is a great example to walk through. For one, it helps you understand the way we look at markets, but selfishly it’s also great because it reiterates a lot of principles that I want to continue to focus on moving forward. Writing helps. Everyone wins.
Re: Small-cap Russell2000 $IWM on Sept 24th 2018:
If we’re below 169, it sets up a lot of the same risks mentioned above in the S&P500: Bearish Momentum Divergence and a failed breakout, therefore increasing both opportunity costs and downside price risk”
169 was that former high in June. If we were below that, it invalidated any bullish thesis you could have, and it suggested that the risk for stocks was down, not up.
For you newcomers, this is what happened immediately after $IWM broke below that 169 level we pointed out: A swift 25% decline for the Russell2000 Index in just 3 months.
Notice how the aggressive selling started right after prices broke back below the 169 level, confirming both the failed breakout and bearish momentum divergence. This is the market proving that there is an overwhelming amount of supply relative to demand at that price. There are more sellers than buyers there. It’s as simple as that. (Learn more about this principle here)
Great, so why should we care today? What does this have to do with 2020?
Well, let’s extend that support/resistance level that we call 169 to today’s market. We are finally, after 16 months, back to that critical battleground between the bulls and the bears:
What does this mean?
For me, it really just reiterates the importance of this level. We’re not always right, but in this case, the market keeps proving that this 169 level is the one we need to keep watching. Until the Russell2000 is able to get through 169, I think it’s going to really struggle to make any progress.
The big question at this point is, how long is it going to take?
Like the correction we were betting on in Q4 2018, we didn’t know then and we don’t know now, how long it will take. Based on massive structural breakouts we see all over the world, for now I would argue a more sideways churn for stocks, digesting the gains from last year, is perfectly normal, and well-deserved for that matter.
I think there will be some winners and some losers, but an overall churn for equities is most likely for now. At least for a couple of months.
Place your chips accordingly.