Chart 1: After an October correction, small caps are ready to break out
Just a quick update on US small caps, which I successfully shorted during the months of September and October. I was lucky enough to cover my Russell shorts right at the bottom of the powerful correction, but little did I know that the reversal to the upside would be just a powerful. To me, the tape is signaling that the bulls are firmly in control of this stock market in both the short and medium term.
Firstly, consider Chart 1, above, where last night's action was extremely bullish. The Russell 2000 posted a very strong bullish reversal, despite the fact that global markets were dropping like a rock all this week. Secondly, if we observe Chart 2, we should notice the consolidation below the resistance levels over the medium term perspective (via iShares Russell 2000 Index (ARCA:IWM)). In my opinion, small caps are gearing up for a break out to new record highs.
Bears point to the recent pattern as a market top. They say that we have a topping process similar to 2011, while others say the topping process is also similar to 2000 or 2007. I do not have a crystal ball, so I’m not going to say this is wrong or right. But personally, I trust the tape. I believe, at least presently, that the tape is saying higher… and we shouldn’t argue with the tape!
Chart 2: Many believed ’14 was a repeat of ’11 but they might be wrong
