A Short-Term Trading Bottom May Soon Be Near

The 4-month winning streak is in jeopardy with the Dow, S&P 500, and the Nasdaq all down over 3% in May. Headline news of rising tensions between the U.S and China about the global economy is worrisome resulting in increased intraday volatility. The previously positive tape action has changed considerably in May. Market breadth has been steadily weakening in the last few weeks. New 52-week lows are beginning to expand, and new 52-week highs are shrinking, on both the New York Stock Exchange (NYSE) and . On the other hand, with this decline, comes daily momentum patterns of the major averages being oversold, and in position, for a possible sustainable rally to develop. The retracement so far has been within a normal range compared to prior years following big gains. Short term sentiment is positive now, showing high pessimism (a contrary indicator), so quickly after getting to an extreme level of optimism suggesting a bottom may soon be near.

Where do we go from here?

Figure 1: Russell 2000 ETF (IWM) Monthly

The top portion of the chart above is the monthly Russell 2000 ETF (IWM) ETF and its 50-month Moving Average (MA) (pink line). A moving average (MA) is a technical indicator that smooths out price fluctuations and is useful for trend direction and in determining support and resistance levels.

The IWM, unlike the S&P 500 and the Nasdaq, did not make a new high in April. The IWM peaked on September 2018 at 173.39 and is now down over -13.4% from its high as of this writing. The IWM has been weaker based on relative strength compared to the S&P 500. However, it’s still up over 12% this year. Relative strength can shift quickly. The IWM could soon be a clue that suggests the decline is coming to an end and is ready to rebound. The IWM would need to firm and start to outperform the S&P 500. Over the next few months, look for another buying opportunity to develop, that could test its September high.

In 2009, 2011, 2016, and 2018 (red circles) I noticed how the 50-Month MA was an important area of support after a decline. In 2010 and 2011 it took from   3 – 5 months before a rally began while it took only two months in 2016 and 2018. During all of four periods, the 50-month MA represented a buying opportunity, not a time to get overly bearish. Therefore, if the IWM continues to decline further by -8.9% it will reach its 50-month MA, a buying opportunity. This calculation is derived by taking the IWM current price (150.08), subtracting the 50-month MA, (136.78 pink line) divided by the current IWM price ((150.08-136.78)/150.08). On the other hand, if the decline is worse than expected and the MA doesn’t hold, the next level of support is 120.00, coinciding with its 10-year uptrend (orange line). This area would be a full re-test of last year’s December’s low.

The lower portion of the chart is the MACD, a technical indicator that measures momentum. MACD is on a sell. However, MACD remains on a steady monthly uptrend for 10 years (orange line) since the low on 3/9/09. This confirms that MACD confirmed the IWM September high. Therefore, it is recommended not to take the first sell. The odds favor the decline to be contained followed by another rally. If MACD then fails to make a higher high, a more serious decline is possible.

In Sum:

In my opinion, I don’t believe the recent market decline has been completed. However, risk is likely to be contained on the Russell 2000 (IWM) to the 50 Month MA which stands at 136.78, approximately 8.9% lower. The tape action right now is not as favorable as early in the year. The Russell 2000 (IWM), (small-cap stocks) continues to lag, underperforming the S&P 500.   From a technical perspective our models remain on a buy, momentum indicators are oversold and in position, for a sustainable rally to develop. Short term sentiment (a contrary indicator) is showing pessimism after being at extreme optimistic levels. Watch the Russell 2000 (IWM) for a warning that a short-term trading bottom may soon be near.

Drop me a line! I’d love to hear from you. Please call me at 516-829-6444 or email at bgortler@signalert.com to share your thoughts or ask me any questions you might have.

******Article published in Systems and Forecasts by Bonnie Gortler May 24, 2019

Disclaimer: Although the information is made with a sincere effort for accuracy, it is not guaranteed that the information provided is a statement of fact. Nor can we guarantee the results of following any of the recommendations made herein. Readers are encouraged to meet with their own advisors to consider the suitability of investments for their own particular situations and for determination of their own risk levels. Past performance does not guarantee any future results.

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Bonnie S. Gortler

Bonnie Gortler, a Consultant, Coach, and Author, is a Wealth & Well-Being expert with over 35 years of experience in managing multi-million-dollar client portfolios at a top-rated investment firm. As the author of Journey to Wealth, Bonnie is dedicated to teaching the importance of risk management and achieving true financial well-being by integrating both the technical and mental aspects of investing. With an M.B.A. and certification as a life coach, Bonnie combines her passion for coaching, consulting, and blogging to inspire people globally. Her powerful techniques and winning mindset help others experience personal growth and financial success. Explore wealth-building tips, personal development strategies, and more at BonnieGortler.com, and discover how you can enhance your wealth and well-being.  


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