Wednesday's downside market reversal didn't exactly come out of the nowhere -- if you were paying attention to the Russell 2000 Index (^RUT). The index once again telegraphed a turn to the downside, and it continues to call the turns in this market on a daily and intraday basis.
Wednesday morning's action in the Russell 2000 was particularly ominous, as it struggled to remain in positive territory while the S&P 500 reached multi-month highs and the Nasdaq indices scored new multiyear highs. At the early morning highs, the RUT was unable to fill Tuesday's gap at the 824.81 level, never mind the gap from last Friday at the 825 level. Just minutes into the open, RUT turned south while the S&P 500 and Nasdaq were still trading near their respective highs -- not a good near-term sign.
Something had to give. Either the S&P 500 and Nasdaq would pick RUT up off the floor, or RUT would drag the major averages down into the dirt. It turned out to be the latter, as the market came unhinged in the final hour of trading and the S&P 500 and Nasdaq suffered their first bearish key reversals of the new year. As for RUT, the good news was that the selloff led to the complete filling of Monday's gap at the 813.33 level. Short term, that represented a little buy signal for me, so at Wednesday's close I added to my Russell 2000 positions, despite key reversals elsewhere. So far, so good on that score.
Since Wednesday's selloff and the filling of the downside gap, RUT seems to have a new lease on life. This morning, it finally popped up to fill Tuesday's gap at 824.81, as well as last Friday's gap at 825. RUT is now leading the charge to the upside, once again, and that's how I like it when I am long. Of course, on the bearish side of things, RUT still hasn't returned to its Feb. 3 highs at the 833 level, but we'll take what we can get.
As for the S&P 500, it has exploded higher and now is taking out Wednesday's multi-month highs. Next stop is the gap at 1357 from May 11, and then the major resistance at the multiyear high at 1370.58.
Apparently, these bearish key reversals didn't mean much -- or at least they haven't so far -- though this round is far from over.
In the futures, it's worth noting that there was no bearish key reversal, as Wednesday's selloff held just above Tuesday's lows. More good news from the futures corner is that in the process of the pullback, the gap and island from Monday were aborted. As of late Thursday afternoon, the E-Mini was near new multi-month highs -- another bullish omen for the near term.
As if the market needed another reasons to point higher, the McClellan Oscillator registered an almost oversold -83.8 at Wednesday's close. And then the VIX popped to a high of 21.77 -- not quite as high as last Friday when the market sold off, but close enough.
At Wednesday's close, I added to my bullish positions in the Russell 2000 at Rydex (for mutual fund switchers) and wrote some iShares Russell 2000 (IWM) out-of-the-money puts for my option accounts. I'm now back to a maximum of about 50% invested, including my long positions in junk bonds and short position in treasuries up to about 5% each.
