No one should be surprised that Friday's pathetic rally gave back some of its gains. What was a pleasant change in the market though was that for the first time in a month the Russell 2000 had consecutive green days. It was only the third green day for the small cap index in the month of October.
Typically I show you the chart of IWM relative to the S&P ETF SPY. I have been using a range on this ratio for years. This year the ratio peaked in June (near .61) and I have been of the mind that it would make its way to the bottom of the range in the .55 area. I was asked though what made me decide to use this range.
I did not decide anything. The market decided it. Today we are going to look at the chart of the S&P relative to the Russell 2000 because that's what I keep a spreadsheet on. Using a website I cannot show you longer than five years. Here is the chart going back to 2010 and you can see, the range is pretty much what we get with a few exceptions. And even when we get those exceptions the spurt up or down out of the range doesn't start a new trend but rather comes back into the range.
The last time the range was broken to the upside (that would mean the S&P far outpacing the Russell) was the 2015-2016 period. The move to the top of the range (arrow) was the August 2015 decline. The move up and over was the January 2016 decline. So sure it's possible we explode out of this range but I don't think we will. At least not yet. There should be a period of stalling out or reversing from here. Even if you look at the 2015-2016 area you can see it didn't go through without some work.
One reason is that we are still oversold. When it comes to the Nasdaq Momentum Indicator I walked Nasdaq down 250 points between now and the end of the week, taking it to a lower low than last Thursday. And still the Momentum Indicator goes up.
This doesn't mean we have to rally -- nothing is perfect -- but it certainly helps the case after Tuesday.
Speaking of lower lows, Nasdaq is about 150 points away from a lower low (than last Thursday). There were 401 new lows that day. If we took out last Thursday's low and there were fewer than 401 new lows that would be a minor positive divergence (there were 150 new lows during Monday's decline)
For the NYSE there were 526 new lows last week. Monday saw just over 200 stocks making new lows. The S&P is about 40 points from a lower low. So this is what I would pay attention to should we tumble further in the next day or so.
I want to reiterate that the charts look awful. But ugly charts can turn good and good charts can turn bad. The 200-day moving average line will likely flatten out in the weeks ahead (more on that later in the week). But that doesn't mean we can't have an oversold rally.