Long time readers know I am a slave to my indicators. Many folks prefer to look at the charts and draw lines to determine their market view. I prefer to watch the indicators.
In fact I often like it when an uptrend line breaks if it causes panic and we're oversold because it's a buying opportunity. Yesterday I reviewed the 200-day moving average and how I use it (what is the direction?) vs. many others who tend to care what the level of the moving average is.
Today I do want to talk about two moving average lines on the Russell 2000. I noted this about a week or so ago and I am surprised I have not seen much chatter about it. The 50- and 200-day moving average lines on the Russell 2000 are now a mere 12 points apart. The 50-day is definitely heading down; the 200-day is mostly flat like the S&P. I expect sometime in the next few weeks the 50-day will kiss and likely cross under the 200-day moving average line. Many call that a Death Cross.
By Death Cross they mean "sell signal." I have seen it work (and have seen it not work). Mostly I look at it and think this area is going to be some serious resistance on the chart. Let's call it 1,600-ish. I have been a fan of the small caps since the rally began and I have had my eye on that 1,600 area. As you can see the mid-October rally stalled out there and now it appears we may very well have these two important moving average lines converging there.
If the Russell pulls back from there (my expectation is that it will pullback) and the chorus of bears gets too loud and the market gets back to an oversold condition, I would once again look for a rally. But since I have not seen much chatter on this I thought you should be aware of it.
You should also be aware that there is a head and shoulders top -- a big one -- developing on the chart of Nasdaq. Here too, I have seen very little chatter on this pattern. If we do get a pullback next week we might just get folks to see it. And if there is hysteria and we get back to oversold, I would once again look for a rally.
Right now my expectation for the market is still a pullback and another rally.
Finally I want to touch on oil. It has been red for nine straight days. I read somewhere that it has never been red more than 10 consecutive days. I turned bearish on oil in early October when it tagged my target of $75-$76 and the Daily Sentiment Index (DSI) got to 96. The current DSI is 17. My guess is we see a short-term rally and back down again. That next move down should net us a DSI under 10 and a buying opportunity.