The S&P 500 and Dow
Jones Industrial Average, for example, have both retraced to their 61.8% Fibonacci retracement levels, from their July 15 lows to July
23 highs. The Nasdaq Composite has retraced half of its recent gain. But since
it showed relative strength on the way up, it should not surprise you to know
that the Russell 2000 has only pulled back to its 38.2% retracement level.
If stocks are going to resume their uptrends in the near-term, the
Russell 2000 should continue to lead the way, and the current pullback provides
a very low-risk entry to take a position. The vehicle we prefer for buying the
Russell 2000 is Ultra Russell 2000 ProShares (UWM). Notice how its daily chart
nearly matches the performance of the Russell 2000 daily chart:
Why buy UWM instead of the more well-known iShares Russell 2000 (IWM)? The
main reason is the leverage. If the Russell 2000 rallies 1%, UWM will gain 2%
(and vice versa). Since indexes typically have much lower volatility than
industry sector ETFs, the leveraged ProShares family of ETFs gives us more "bang
for the buck." This is especially important for traders with small accounts, as
not a lot of buying power is required to be tied up. As with yesterday's setup
in UUP (which did not yet trigger), subscribers should note our detailed
trigger, stop, and target prices for the Ultra Russell 2000 ProShares (UWM)
below.
Yesterday's sell-off may have been a disappointment to the bulls, but it was
not shocking to us. In yesterday's commentary, we said of the state of the broad
market that, ". . .we are neutral on the near-term. The corrective action on
July 24 was healthy, and stocks recovered a bit of their gains the following
day. However, the major indices, with the exception of the Russell 2000, still
remain firmly entrenched in primary, long-term downtrends. The S&P 500 and
Dow Jones Industrial Average both fell back below their 20-day EMAs as well.
This all means the near-term trends could be choppy and indecisive, which is why
we are neutral. As for the intermediate-term, it's looking more and more likely
that the major indices will
not be violating their July lows anytime
soon. Just don't forget that we're still in a bear market. Large, unexpected gap
downs are common in such an environment. Overall, odds probably favor the long
side of the market right now, but stay alert and cautious until the major
indices prove they can move above last week's highs. Buying with reduced share
size on all new positions is a great way to sensibly reduce risk." These
thoughts pretty much summed up yesterday's subsequent action. The major indices
are still holding well above their July lows, but are not in a hurry to move
higher. We're indeed content with having a neutral bias on the short-term, but
small-caps are the place to be if buying anything.
Open ETF positions:
Long - EWH
Short - (none)
