How Bad Can It Be?

In Wednesday's newsletter, I showed a chart of IWM, the ETF related to the Russell 2000 index (smaller cap stocks).

I noticed more than one article on the web identifying IWM and suggesting this could be the start of a significant pullback. I wasn't quite as morose Wednesday when I added “But notice a similar setup in mid-March quickly faded away and IWM resumed moving upwards.”

Even after Wednesday's 1.57% drop in the S&P, the major indexes still aren't showing anything for major concern. The IWM is the worst looking, and is it really that bad?

IWM reversed yesterday, just below its 50-day moving average, managing a .86% gain. Could a short-term cycle low have formed in the markets? Possibly. The IWM has been the index most clearly showing cyclical movement. Using the stochastics to help identify short-term lows, I've labeled the past year's IWM chart:

IWM is showing a key fact you'll find in most index charts, over nearly any time period. There is basically a regular, one-month cycle in the markets. In stronger periods of the market, you'll at best be able to identify only a slight low around the time a low is due. But for most months within any 1-year period, it won't be hard to identify regular lows about one month apart on average.

Looking at the above chart, this week's action in the indexes doesn't look so bad. Of course, the markets could open today and plummet. Nothing is 100% guaranteed. But for the moment at least, I don't see the odds pointing strongly to a sell-off.

Near the end of the month I'll focus on the ‘Sell-in-May' philosophy and the questionable statistics you'll soon start seeing in the financial media supporting the concept that the next six months are a lost cause for traders.

Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day.  To find out more, type in www.markettamer.com/seasonal-forecaster

By Gregg Harris, MarketTamer Chief Technical Strategist

Copyright (C) 2013 Stock & Options Training LLC

Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.

Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.

Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg's passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.

As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.

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