Is the recent Russell 2000 sell off an opportunity or is more pain ahead?

David Bartosiak
March 28, 2014

After reaching new highs, the Russell 2000 (affectionately known here as R2K) had a quick and forceful sell off in the last week. Lots of high flying stocks were struck down and plenty of investors had their hats handed to them. Just as investors were heading to the exists and peeling off risky names one by one the R2K found some support yesterday and broke higher today.

Was the sell off an opportunity to load up on small cap and other higher beta names or do we have more downside to go?

Take a brief look at my R2K chart and I’ll point out something that swing traders often look to. If you’ve read my past work you’ll see I often refer to the “25x5” moving average. Basically it’s the 25 day moving average shifted to the right by 5 days. The short answer for why I do that is the shift helps to prevent whipsaws when trading with it, while still keeping a finger on the pulse. For even shorter term timeframes I subscribe to the “3x3” moving average. You guessed it, 3 days shifted by 3. Again, I’m not going to go into the details of why, but I will tell you I didn’t invent this philosophy. It was created by a very famous futures trader.

One way to use the 3x3 is to note how price interacts with it. The recent topping process the R2K took before the last pullback was a textbook reversal. Coming off the high March 4th the R2K came back to almost exactly 50% of the range of the move from February 5th. What it tells us today is that if the R2K closes above yesterday’s high of 1161 then we are back in business and cleared for takeoff. Since this RTI goes up at 1pm, we’ve got a couple hours before we’ll find out. As of this moment, however, it appears that the R2K is losing ground in late trading and will settle below 1161.

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