SMALL CAPS LOOK TOPPY AND ARE STARTING TO WEAKEN -- WHILE THE S&P 500 SPDR IS TESTING OVERHEAD RESISTANCE AT ITS JANUARY HIGH -- THAT COULD LEAD TO A CHOPPY AUGUST
SMALL CAPS ROLL OVER WHILE SPY TESTS JANUARY HIGH ... Stocks are beginning to look a little toppy. That's especially true of small caps. Chart 1 shows the Russell 2000 Small Cap Index ($RUT) ending the week below its 50-day moving average (blue circle). The RUT has been losing momentum over the last month. Its 14-day RSI line (top box) has been dropping since June. So have its MACD lines (middle box) which turned negative a month ago. Those "negative divergences" usually result in lower prices. The RUT could be headed down for a test of its late June low. Since small caps have been leading the market higher, any weakness there could stall the overall market advance. Chart 2 shows the S&P 500 SPDR (SPY) testing its January high at 284. That's a pretty formidable resistance barrier. In addition, its 14-day RSI line has reached overbought territory at 70; and its daily MACD are testing their June high and starting to converge (see MACD histogram bars in green circle). That suggests that the SPY may experience some profit-taking of its own. Selling in technology stocks this past week removed more upside leadership from the market. Stocks could be in for a choppy August which is normally one of the weakest months of the year. The good news is that seasonal factors usually turn more positive after the summer. That's especially true in midterm election years like 2018.
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Chart 1
