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Small Caps Turn Negative as Momentum Accelerates

David Becker
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www.iforex.com
Small Caps Turn Negative as Momentum Accelerates

Russell 2000 iShares (IWM) and the S&P SmallCap iShares (IJR) are showing relative weakness in September and leading the current correction. The S&P 500 SPDR and Nasdaq 100 ETF hit new highs and remain in long-term uptrends. Any pullback, therefore, would be deemed a correction within a bigger uptrend. IJR and IWM, on the other hand, fell well short of their July highs and only retraced 62% of the prior decline. With a down turn over the last two weeks, lower highs formed in IJR and IWM. This means it is possible that bigger downtrends are beginning.

The August uptrend has reversed and the ETF is in a downtrend for September. Adding a couple of trend lines reveals that this September decline could turn out to be a falling flag, which is a bullish continuation pattern. For now, however, the price action on IJR is negative and a lower trend could be in place because of the lower high and September downtrend. The MACD also generated a sell signal which points to lower prices.

Internet stocks came under selling pressure on Monday as the Internet ETF (FDN) moved to the lower Bollinger Band. The FDN shows a triangle breakout and BandWidth expansion the second week of August. After moving above 62 in late August, the ETF stalled the last few weeks the Bollinger Bands narrowed.

The BandWidth indicator dipped back to the August lows. This is a critical moment for the uptrend that began with the late May breakout. First, notice how FDN broke down in March and prices hugged the lower band during the downtrend. FDN reversed with a breakout in late May and prices exceeded the upper band on several occasions over the last few months. The lower band is currently around 61 and a break below this band would show strong selling pressure. This in turn could signal the start of a downtrend for the Internet ETF.

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