Focus on the Russell

 | Oct 10, 2011 | 6:53 AM EDT  | Comments
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It's all about the perspective. There was a time, about six months ago, when an employment report similar to what we saw Friday would have made the bulls jump for joy. Alas, as it appears there are no more bulls left on Wall Street, there was only a sell-the-news reaction.

On the flip side Friday, meanwhile, were Fitch Ratings' downgrades of Italy and Spain. Sure, that took down the U.S. market -- but, given the preceding week in the market, stocks could have been down a lot more.

I continue to look for a pullback in the coming days. If we go by my oscillator, the market is still slightly overbought. Often I can pinpoint the next upcoming oversold reading, but this one is not so simple. Let's say that, sometime around midweek, the market should be back toward oversold again. Again, the overbought and oversold readings in the past week or so have all been of the moderate variety, and that includes the current overbought condition. The upcoming oversold reading is set to be moderate, as well.

If you are looking for some bullish news on that front, at least the 30-day moving average of the advance-decline line will be back to an oversold reading around Friday.

I continue to monitor small-cap stocks. I noted last week that the ratio of the S&P 500 to the Russell 2000 might have peaked, and suggested watching this closely for signs that no higher high was made. Even with the Russell's tumble on Friday, that ratio is still below last week's high of 1.8.

I will continue to focus on this relationship, and one reason for this is the momentum in the Russell 2000 itself. From time to time I will take a look at the Nasdaq Momentum Indicator and do some "what-if" exercises in order to see what it would take to make it overbought or oversold. This weekend I did this exercise with the Russell and the results were interesting.

If I plug in a move of about 10% to the downside for the Russell for the next five trading days (i.e. to a close of 600 by Friday), notice what happens to the Momentum Indicator: It goes up. That is another way to show that the Russell would lose downside momentum, even if it were to head lower in the early part of this week.

We all know the small-caps have been the most decimated area of the market in September, so I will continue to look for signs that this is over. If we are seeing an end to the decimation, then that head-and-shoulders bottom I discussed Friday should begin developing in the next few days. I think that pattern is still very possible.

I'd like to make one final point. If the market is all about how bad Europe is, then why is Germany's DAX well off its lows and, in fact, trading at the highest level in nearly a month? If Europe is leading U.S. shares, then this chart says the bulk of the selling could be behind us.

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