After Monday's reversal candlesticks there were risks of 'bull traps' for the Nasdaq and Russell 2000, but yeterday's gains have managed to negate not just the 'bull trap' risk, but also the bearish inverse hammer and doji from Monday. In addition, the S&P managed to register a breakout.
The breakout in the S&P came on higher volume accumulation, although On-Balance-Volume remains on a 'sell' trigger. The index has also accelerated its underperformance relative to the Russell 2000 - although this is more bullish than bearish for the broader market.
The Nasdaq has gapped off a small bull flag and has again resumed its advance towards its 200-day MA. But, like the S&P it has a 'sell' trigger in On-Balance-Volume. The index continues its outperformance relative to the S&P.
The Russell 2000 had the best of the action as it enjoyed a relative performance gain against the S&P and Nasdaq, with an acceleration in the MACD to a new multi-year high (well above the bullish zero line). Best of all was the negation of the bearish 'inverse hammer' from Monday with yesterday's close. This index will be the first to test its 200-day MA. The only caveat is that the rally has been running along a well defined trendline, with little in the way of a pullback to consolidate the advance. Despite this, the gains since June's lows have been welcome.
The further we move away from June lows, the more the FOMO crowd sitting on the sidelines waiting to buy-the-bottom will feel pressured to participate in the rally. The Russell 2000 has already cleared the June swing high from the decline, now we need to see how the next swing low develops - something we have yet to see start.
The Russell 2000 is the index to watch as it will determine if the next rally is just a flash in the pan or something more sustainable. I want to see a strong swing low, and for that we need to see a sequence of losses.