Small caps: down but not out

 

The small caps (U.S. Russell 2000 and iShares CDN small cap index fund) began declining in July, differing from the North American large caps (S&P 500 and TSX 300) – which continued their aggressive uptrend over the same period. Is it game over for North American small caps? Let’s see what the charts have to say:

XCS

Starting with the domestic market, the Canadian Small caps peaked in July, and have, as a group, tended to move sideways over much of the summer. Declining highs with a flat support (lows) level suggest that this consolidation pattern is a descending triangle of sorts. As always, only trade in the direction of breakout within a consolidation pattern. At this stage, you cannot make a trading decision, given the fact that this index has not broken out on either side. Comparative relative strength to the TSX 300 (seen between RSI and MACD) remains bearish.  Having said that, there are signs that the potential for an eventual upside breakout may slightly outweigh the odds for a downside one on this ETF. For example, money flow (top and bottom panes) is positive and trending up. Momentum is declining—a bearish sign, but it’s getting oversold. Oversold levels usually come to reverse themselves sooner or later. Wait for a hook up on stochastics, RSI and MACD to confirm a change in momentum. That would be an intermediate term trading signal, probably good for a multi-month move.

iwm

The US small caps, as illustrated by the Russell 2000 ETF, has been a more volatile ride for stock investors. It’s been in a rather ragged uptrend, punctuated by big rally and drop periods. Current support lies at $110, and resistance is around $120. You could trade the swings if you wish. I’d probably wait for a bounce off of the lower trend line to buy (confirmed by momentum hookups) or a decline from the top line to short (confirm the momentum to the downside). Money flow looks good for this sector, momentum is weakening, and comparative relative strength to the S&P 500 is pretty darned flat. Given the “half way” status of the ETF between the upper and lower zones, I’d avoid trading this ETF at this time. You’re not close enough to the top or bottom of the band to trade profitably, and the risk remains for a quick reversal in fortune. However, there are some obvious patterns happening here that shorter termed traders should be watching.

 

These ETF’s deserve to be on your watch list. Again, I suggest you avoid trading either of the small capped ETF’s until a breakout happens, supported by a hook up in some of these indicators…it’s the safer way to trade.

ValueTrend Performance Update

As you may be aware, I’ve never shied away from exposing myself–my investment performance that is, to the investing public. Our numbers ending August 31, 2014 are posted here:

https://www.valuetrend.ca/performance-investing-portfolio-management/

 

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