The Current Market Structure Heading into the Weekend

• Posted by Robert Sinn
• on May 18th, 2012

I am 45% net long equities at the current time ($AMD $GDX $GDX $IWM etc.), however, I strive to always remain as objective as possible; therefore, I believe it is a good moment in time to examine the current equity market structure. The head & shoulders top on the Russell 2000 ($IWM $RUT) has been well known and plainly evident for weeks – let’s analyze the current head & shoulders on the Russell in more detail:

Remember last year’s big head & shoulder’s top on the S&P 500 ($SPY $SPX)?

 

Both last year’s S&P 500 top and this year’s Russell 2000 top are similar in terms of symmetry, however, there are many more differences between the two than there are similarities:

• 2011 S&P 500 H&S top had a nearly textbook volume profile with higher volume at the left shoulder and lower volume at the right shoulder – the 2012 Russell 2000 top does NOT
• The SPX executed a vicious “trap” on August 3rd as it printed a high volume “hammer” potential reversal candle after testing the neckline – the following day it gapped lower below the neckline and proceeded to trend lower throughout the session on heavy volume
• The IWM spent several days toying with its neckline around the $78 level before falling below the neckline in an orderly fashion on May 16th – in other words those who wanted to sell were able to sell and there are many fewer “trapped longs” in IWM now relative to SPY on August 4th, 2011
• The S&P had a rising 200-day SMA in early August 2011, whereas, IWM has a flat 200-day SMA
• The break of the neckline occurred on heavy volume in August 2011, whereas, the break of the neckline in IWM two days ago took place on average volume

 

The current sell-off in equities is relatively orderly and has taken place in more of a “grinding” manner as opposed to the early August 2011 decline which was dramatic and took many by surprise. Very few were able to get short before the waterfall decline through the SPY neckline on August 4th which is in stark contrast to the current sell-off which was telegraphed days in advance. In fact, the orderly IWM neckline breach and the ensuing straight line decline since has been almost too easy for the shorts.

While the market can do whatever it likes and in the event of a disorderly eurozone meltdown I have no doubt that equities will trade much lower. However, should a positive catalyst emerge in the near future it seems to me that the Russell 2000 is a coiled spring which could easily test its neckline from underneath in a bout of short covering.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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