RUSSELL 2000 CAN'T GET BACK OVER ITS 200-DAY LINE - RECENT MARKET BOUNCE LOOKS LIKE A BEAR FLAG AND A WAVE 4 WHICH MAY BE ABOUT OVER
HEALTH CARE HOLDING UP OK ... One of our readers asked if the healthcare group was still holding up. The answer is yes. Chart 1 shows the Health Care Sector SPDR (XLV) still trading over its 50-day moving average. Its relative strength line just recently hit a new high for the year. The slippage in the RS line during April was most likely due to the rebound in the stock market. I suspect the RS line will start to do better if the market starts to slip again.
Chart 1
RUSSELL 2000 STILL UNDER 200-DAY LINE ... I'm going to try to respond to three different reader questions with the next chart. One reader asked where the Russell 2000 Small Cap Index fit into the picture. Chart 2 shows the RUT managing a modest bounce over the last two weeks, but meeting resistance at its 200-day moving average. That makes it slightly stronger than the Dow and the Nasdaq, but relatively weaker than the S&P 500 Large Cap Index. Another reader asked if the recent rebound looked like a bearish flag. I'd have to say yes. To make that point I've drawn two rising parallel lines around the recent rebound. A rising flag is normally a continuation pattern in a downtrend. That means prices should soon resume their downtrend. The fact that prices have risen on lighter volume makes that bearish interpretation more likely.
Chart 2
IS THE RISING FLAG A WAVE 4 BOUNCE? ... The third question was whether or not the recent bounce qualifies as a Wave 4 in a five wave decline. Again, I think the answer to that is a qualified yes. I've labeled each of the waves since since the March top, showing that the rising flag has the appearance of a Wave 4. [That's another reason why I recently identified the late March low (1) as a potential resistance level. A Wave 4 bounce shouldn't exceed the bottom of a Wave 1]. So far it hasn't. If I'm reading all of the these patterns correctly, it looks like the recent rebound is about over and that the market is about to turn down again.
