Legacy Funds

Liquid – Transparent – Alt Investment Strategies

Time to Analyze the Russell 2000

As the DOW and S&P have been setting highs for the year, the small caps have not. This is another sign to be cautious, especially with the DOW and S&P in close proximity of the 50% Fibonacci retracement. Many times in previous posts we have noted how the S&P is coming up on its downtrend line from October 2007 and pointing out the 50% retrace at 1120 (see seekingalpha.com/instablog/405677-suzanne-h/27897-don-t-try-to-pick-a-top-in-this-market). As traders we have to honor the short and intermediate term technicals, but not forget that the long term trend which has been in place for 2 yrs is still bearish. So far that means this rally since March, as enticing as it is for most investors, is still a bear market rally. Again as traders, we don’t trade off the long term trend and need to follow the short and intermediate term technicals. We have been successful picking quick short trades when turning down from resistance so that stops are very close in case the market goes higher.

However, back to the small caps index that has been lagging, lets take a closer look and translate that to actionable trades. Let’s look at the Russell 2000 $RUT since before March of this year:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For an actionable trade we can look into trading RWM, Short Russell 2000. These are best traded on a short term moving average. We did a trade in our separately managed client accounts back on 10/26, buying RWM in the vicinity of the 7 dma at $46.08 with a stop set slightly below the moving average (taking the ATR on the chart and subtracting that from the moving average) — so the risk/reward was highly favorable. As long as RWM closed above the 7 dma, we stayed in the trade. We decided to sell when RWM hit resistance of the 80 ema, getting out at $50.10 on 11/3 instead of waiting until it closed below the 7 dma, which it did a few days later.  Since then it has now crossed the 7 dma once more and we are looking for another favorable entry.  The stop is roughly around $47.12 (7 dma) – $1.04 (ATR) which equals $46.08.  Obviously, the closer our entry to the stop price, the more favorable the risk/reward.

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November 22, 2009 - Posted by | Legacy Funds | , ,

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