Here is the updated weekly chart with the same notations I made on the original chart from November. We see that the Russell 2000 fund managed to move slightly above the resistance, but it wasn’t able to close a week above it.
What bothers me more about the weekly chart on the IWM than the resistance is the pattern that is developing. See how it is having trouble moving back above its 52-week moving average and how it is below its 104-week moving average? It did something similar back in late 2007 and at the beginning of 2008.
The 13-week moving average made a bearish crossover of the 104-week in early 2008. After the crossover, the Russell 2000 fund moved sideways for several months before the bottom fell out in September 2008. When the IWM attempted to rally, it ran in to resistance at a combination of the 52-week and 104-week moving averages. That happened in June 2008 and then the fund made one more attempt at a rally before finding resistance at the 104-week. Then the bottom fell out of the IWM and the overall market.
Flashing back to the current chart, you can see that the 13-week moving average made a bearish crossover of the 104-week back in October and now seems to be moving sideways, with the fund unable to retake its 52-week moving average.
Another factor in the price action of the IWM that concerns me is that it is the only ETF that represents one of the major indexes that is trading below its 104-week moving average. The ETFs that represent the Dow Jones Industrial Average, Nasdaq Composite and S&P 500 (DIA, QQQ, SPY) are all above their 104-week moving average, but that was the case back in 2007-2008 as well.
The IWM, representing the small-cap Russell 2000 Index, was the first index ETF to experience the bearish crossovers of the 13-week crossing below its 52-week and 104-week moving averages. And here it is first again and that is concerning.
While the big sell-off in China spooked the domestic market on Monday, the market bounced back and instead of a loss over 3%, we ended up with a loss of just over 1.5%. Because investors were in the market buying, that suggests to me that there is still a lot of optimism toward stocks. Investors are still looking for bargains after the incredible bullish run the market went through from 2009 to 2015. That is very concerning and very reminiscent of early 2008.
The pattern in the Russell 2000 fund concerns me. It isn’t something so concerning that I would recommend rushing out and selling your stocks today, but I do think investors need to back off on their equity holdings and/or take some measure to hedge their portfolios.
You can buy inverse ETFs to help protect against a downside move, or you can buy long-term puts on the overall market or on specific holdings. Either way, this market is starting to remind me too much of the environment we had in 2007-2008, just before the market tanked.
This article is brought to you courtesy of Rick Pendergraft from Wyatt Research.