RUT 2000

rut april 12 2018 brut  april 12 2018 s

The last month or two have, if anything, been most annoying. The degree of ambiguity is stunning and the ultimate resolution is probable still a few weeks away.

What we have here is the Russell 2000, one of the broader indexes in the U.S.  In the left chart the move from about 1000 to 1600 – nice Fibo ratio, by the way – makes it plausible to presume that this is a 5th wave from the lows of March 2009 of roughly 350, see below;

RUT april 12 2018 vb

Then the chart on the left displays, at first blush, what looks a hell of a lot like a triangle. Today we seem to be completing wave d of that triangle. So all that is left is a small e and we could get a thrust up of about 200 points.

All legs within a triangle must be 3-wave affaires. To me it is not perfectly clear that they are. Superficially waves a and c “look” like 5-wave affairs  but there may be a small wave at the top too many. The waves b and c are unequivocally 3-waves. So it is still possible to count this as a series of 1-2s, in which case we will accelerate downward fast.

Given this uncertainty only a fool would hold a long position if you look at the big picture. There is a lot more downside than upside so you will have to be very nimble in an environment where, for all we know, Stormy Daniels may become the next attorney general.

RUT, Russell 2000 index.

RUT 2000 july 8 2017 C of the dayRUT 2000 july 8 2017 b

The chart on the left is, of course, from www.chartoftheday.com , readily available to anyone that subscribes, for free. Sometimes they provide you with an insight that you might not have thought of on your own. This is the chart of the Russell 2000, that is the 2000 smallest stocks taken from the Russell 3000, weighted according to the float capitalization. The median cap. size is a little less than 1bln. This makes this index hard to manipulate as there are too many stocks and few are typical “momentum” stocks like the FANG stocks. Facebook, Amazon, Netflix and Google. Arguable, it is therefore the most ‘’accurate” or “true” index.

     The shape or structure of the chart is clearly that of a “diagonal triangle” to use the EW jargon. In plain English that is a wedge that gets smaller and smaller as it works its way into the corner. These occur only as a 5th wave if and when it is part of a full 5-wave sequence. That is nice to know as the chart cannot go beyond where the two boundaries intersect and more often than not the peak is reached well before that.  Also, once reached the stock/index normally retraces the entire 5th wave and does so rather violently often in just a fraction of the time it took to reach the top, here from the lows of 2003.

       To put this in perspective, we have created a much longer chart, also on a semi-log scale, using Bigcharts.  It starts around 1987 which is the year in which most EWavers agree that a wave 2 occurred. From that point on we have a wave 3 and a wave 5 which is, perhaps, not quite finished. So far 5 is actually a little shorter in proportion to 3 using log terms. As a diagonal it should follow the 3-3-3-3-3 pattern which it does seem to do.  Alternatively there is no diagonal. Instead it is a normal straightforward 5th way as in a 5-3-5-3-5 pattern but starting at the lows of 2009. Either way the next big move should be back down to the level of the 4th wave of previous degree! But do not forget that  we are looking at a 14 year developing wave so the timing is more in terms of weeks or even a few months than yesterday or tomorrow.

        The “too good to be true” test certainly does seem to support the notion that some big correction should happen soon. 5 times your money in the eight years since the great recession lows certainly fits that criterion if you ask me.

 

If you draw the trend channel properly, the 2009 point as the start of a normal 5th wave makes slightly more sense. It also suggests that we are pretty close to topping.

rut 2000 july 8 b2 2017

an encore to the DAX blog

stoxx 600 june 6 2017rut june 5 2017

Here we have the Stoxx600 and the Russell 2000. Starting with the Stoxx 600 a case can be made that a near perfect flat was completed in early 2009, followed presumable by a simple 5-wave 5th wave that should make a new high to complete the sequence. All that is missing is a small 4 and 5. Time wise the drop in wave 4 and the rise in wave 5 are now almost equal.

Looking at the Russell 2000 the argument could be that a very large diagonal started much earlier in late 2002. The proportions sort of argue against this, so it is more likely that a simple 5-wave 5th wave started in this index also in early 2009. Alternatively an expanding diagonal could also be fitted in from this point. In both cases a small wave 4 seems complete and we are now in 5.

Regardless of what count applies, the conclusion that we are close to a peak seems to be inescapable. What is truly amazing is that both these broad indexes, one for Europe and one for the US are at these levels. Particularly the RUT 2000 seems to confirm the adage that “the sky is the limit”  which, by the way, also follows from the discounted cash-flow approach.

NYA (NYSE) and RUT (Russell 2000)

NYA apr 23 2015RUT apr 23 2015

They come in all sorts of shapes but all are wedges. The structure is a 3-3-3-3-3, that is three legs up and two intervening legs down. Pretty simple but also very elusive as these things can go on for longer than you think. In fact, on the Russell we thought it was over about a month ago, where the little black arrow is. It was not. But fortunately the space between the lines is finite so we can now say that the RUT cannot continue for more than one month!

The other broad index, the NYSE has the same pattern but a little less sharp. If you look closely you can see that as recently as yesterday this index was trading at the same level as it did 10 months ago! Not much to show after all the efforts by nearly all the World’s central bankers to spike the punchbowl. In fact you cannot help wonder why they do not hire this British guy to spoof the e-mini S&P contracts and who was able to do 1000 points in a few hours without any money at all.

These wedges are very bearish patterns. Almost invariable the market drops back to the base and , more often than not, a lot further. These are, by the way, not the only indices that display these patterns. There are quite a few so there is all the more reason to take it seriously.