Measuring The Market’s Pullback…

The following is an excerpt from Tuesday’s FindLeadingStock’s Intra-Week Update: 08/12/2014
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Not Out Of The Woods….Yet

Chop-City

This update will focus on the very short-term action in the market (the intermediate and long term remain strong). Right now, most of the major averages (except for the Nasdaq which is holding up well as it is still above its 50 dma) are largely trading between their respective 50 DMA (near-term resistance) & their 200 DMA (near term support) lines. This area (between the 50 and 200) is an area that I call; Chop City. Keep in mind that (so far) the latest pullback has been shallow in both size and scope (see table below) which is a healthy event. Furthermore, all the popular indices are trading only a few percentage points below their respective record/multi-year highs (another healthy event).

The Next Move Wins

Going forward, the next move wins, either the major averages break above their respective 50 DMA lines and hit new highs or they take out August’s low and continue pulling back. After a big move off of last week’s low, the market is pulling in a little here to digest that move. It would be healthy to see this be a short-lived and light pullback. As the title says, we are not out of the woods just yet and a defensive stance is still warranted.

Measuring The Pullback: % Decline From Record High (As of Monday’s Close)

Near-Term
High
Measuring The Pullback: % Below High Near-Term Low
7/17/2014 DJIA 17151 16333 -4.77% 8/7/2014
7/24/2014 SPX 1991 1904 -4.37% 8/7/2014
7/3/2014 Comp 4485 4321 -3.66% 8/7/2014
7/1/2014 RUT 1213 1107 -8.74% 8/1/2014

Good Tell For The Market: Small Caps

So far, the small-cap Russell 2000 ($RUT) has experienced the deepest pullback, falling -8.74% from its record high. We are watching the $RUT closely as a good tell for this market. Interestingly, small-caps led the way down and then led the way back up. The $RUT began pulling back on 7/1 (weeks before the S&P 500 recent high of  7/24 or the Dow Jones Industrial Average’s high on 7/17). The $RUT placed a near term low and started bouncing on Fri 8/1- almost a week before the other major averages (see chart). Going forward, it would be very healthy for this market to the RUT break above above its 50 dma line (already broke above a near term downward trendline which is bullish) and hit new highs. I’m also watching the Nasdaq Comp/Nasdaq 100 very closely as a good tell for risk appetite.

Russell 2000 Index:

RUT

Dow Jones Industrial Average:

DJIA-

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