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 | , , | Leave a comment

What a rally since my last post mentioned a run to 1k on S&P

Little did I know at the time that the S&P will be getting that close to the 1k mark before my next post.  In my last blog (Market Signs) I said:

“Technically, the odds are that the S&P will correct to 810 to 820 area over the next month or so.  At that point careful analysis will be crucial along with risk management to cover shorts and position long for a potential rally to the 1000 or so area.  At that point bullishness will be at high levels and raising the odds for a drop to retest and most likely new lows on the S&P and commodities along with a rally in the dollar, later this year or early next year.”

Did I have a crystal ball.  No.  The market didn’t get down to the 820 area, but the short positions were quickly stopped out.  Does this mean the bear market is over.  Again, not so fast.  We are going by the 20 month or 80 week moving averages for that one — slightly different numbers, e.g., the 20 month for the S&P is currently at  1104 whereas the 80 week is at 1082, but close enough that you are free to follow a monthly or a weekly trigger.  Obviously the shorter the time frame, the better the precision over a larger sample of trades.

Again we are faced with a scenario where the S&P can pullback in the short term before hitting the 1k target or it can make a run for it first and then correct.  We won’t know which one will occur first, but can keep zooming in with a shorter time frame to get a better trigger and manage trades accordingly.  Since we have yet to hit 1k, the weekly charts haven’t changed, so left the weekly chart out this time.  The daily chart shows Fibonacci support levels for any corrections in the near term, along with a 100 dma or if you are a shorter term trader the 21 dma:

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However, even if we reach 1k or 1100, the odds are very high that the market will retest the March lows at a minimum.  Make sure you have your seatbelts fastened.  By that I mean utilize some sort of timing indicator to keep you in and to get you out before a decline, even if the decline doesn’t materialize and you end up having to get back in again at a higher price — that is the cost of protection.

July 26, 2009 Posted by | Legacy Funds | , , , | Leave a comment