Two Charts Suggesting Trouble Ahead? [Dow Jones Industrial Average 2 Minute, Russell 2000]

Wall streetGeorge Leong: Today, I’m going to talk about the technical picture and what to expect going forward.

At the start of the year, I would have been somewhat surprised if you told me the small-cap sector would be in negative ground at the end of the third quarter.

Small-cap stocks and technology fared the worst in September. Small-caps continue to be vulnerable, with the Russell 2000 retrenching 6.19% in the month and down 9.22% from its high. The small-cap index is again nearing the official 10% correction and reversal point, based on my technical analysis, which it ran into earlier in the year but managed to recoup.

The Russell 2000 is showing a bearish death cross with its 50-day moving average (MA) crossing below its 200-day MA, based on my technical analysis. And unless we see a reversal in the fourth quarter, my technical analysis suggests small-caps are heading for a down year.

Russell 2000 Small Cap Index Chart

Chart courtesy of www.StockCharts.com

It has been an uneasy year for stocks, unlike what we have been seeing over the past four years of the bull market. I thought the S&P 500 could gain 10% and 15% in the best-case scenario. At the end of Tuesday, the index was up 6.73%, so I may be close.

In the final trading session of the third quarter, the S&P 500 and NASDAQ pushed back below their respective 50-day MAs.

The technology group has been the top performer in this mixed year with the NASDAQ up 7.59%. The leadership has helped to lift the broader market, but with the NASDAQ at its highest point in more than 14 years, it’s not a surprise to see some topping action, as my technical analysis suggests.

Where we are heading is still unclear at this juncture, based on my technical analysis. At this point, the safest bets would be with the blue chips and S&P 500 stocks, but even they are no guarantee.

A look at the charts shows nervousness with the near-term and intermediate trends, but the long-term trend remains firmly bullish above the 200-day MA, as my technical analysis suggests. Only the Russell 2000 is below.

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