About a half year ago, we measured an upside target of the S&P 500: It came in around 3200.
At the time, I explained that just because you can measure that far up -- or down when a market is going down -- doesn't mean it has to happen right then and there. Nor does that measured target have to be "it." It can go further, but more often than not, there is a correction or a period of sideways action that happens when a target is met.
Everyone seemed to have that measured target, either back then or at some point, because it was so obvious. The way we get a target, is to take the high of the pattern and subtract the low of the pattern and add that difference to the breakout. (If it's a breakdown, then we instead subtract that difference.)
Last spring we didn't know what the market would look like from May forward; we used the top end of approximately 2850 and subtracted the bottom end of around 2550, giving us 300. Let me stop there and note there will be some who would use the 2350 low to get 500, but I say there was not a lot of trading that took place in that final plunge in late December, so I prefer to use 2550. (This is an art, not a science.) If you want to add a bit extra to account for my conservatism, you come up with an area of 3150-3200, give or take. (Note that none of the charts here include numbers from last Friday's half day of trading.)
Now look: If we take the summer trading and the high at 3000 and subtract the low at 2850, we get 150. Add 150 to 3000 and you get 3150. If you prefer to use 3050 on the high end you'd get 3250. You see, it is just math. But isn't it interesting that the summer trading and the trading from the year or so prior all seem to end up measured to the same area?
I bring this up because with the breakout in the Russell this past week we're seeing folks giving out measured targets. A back-of-the-envelope measured target on the Russell 2000, using the iShares Russell 2000 exchange-traded fund (IWM) , would be around $170-$175, but notice that there are now layers of resistance the whole way up.
Now, let's go back to around 2014 to 2015. Notice that IWM broke out of a similar one-year sideways pattern then. It was also the same time of the year, as December was the breakout. It then pulled back and had a shakeout followed by a decent first-quarter rally.
Also notice that the range in 2014 was $110 to $100, giving us $10 to add to $110, which led to the target at $120. I am not showing you this so you can get scared about the plunge in August 2015, but rather to show how similar the breakouts are.
Now let's look at IWM relative to the S&P. Back in 2014 it crossed an almost one-year downtrend, milled around for a few months, and then had a nice run of out-performance.
Now, the IWM relative to the S&P show a nearly two-year downtrend, and despite the move in the small caps this past week, the line has not yet been crossed. This is something to watch.
Why is all of this so interesting? Because on Wednesday the Daily Sentiment Index (DSI) for Nasdaq had its second visit over 90 to 91. The S&P is at 89, so it's quite close. And the Volatility Index went to single digits at 8. Wouldn't it make sense to see a pause or pullback, just based on targets and this sentiment measure, once we're back to an overbought reading again?