Could this trigger a crash?

Jim-SamsonMore banging in my closet. Let me draw your attention to a stock index that’s often neglected, but is packed with companies that are the measure of Main St.- from Ruby Tuesday’s to Rite Aid…

Last week I focused on the Nasdaq as a sign that the tide of the market could be turning, but this week let’s look if this index should also be one to watch in our constant update of when to start switching to profiting from shorting stocks instead of buying them…

The stock index I’m referring to is the Russell 2000 small cap index. As the name suggests, this is where a lot of smaller companies trade, and many argue that small companies are the key to a thriving economy.

I’m going to show you this index from 3 perspectives, none of them very bullish. First, this one below. The curvy blue line is the average price for the last 50 days and the red line is the average price for the last 200 days:

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The RUT (Russell 2000) is BELOW both averages- not good. Furthermore, if that 50-day average line pushes down much more and crosses under the red line, we’ll have a classically bearish sign.

In the chart below I’ve drawn the line in the sand with a straight blue line:

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This marks the current support level, and RUT needs to hold above it.

In the chart below I’ve shown you another ominous and very reliable pattern to make predictions from: the ‘head and shoulders’:

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When you connect the two ‘valleys’ you get a ‘neckline’. When the price violates the neckline lower prices usually follow, and it appears that RUT just did that.

RUT holds such a mixed bag of stocks so one can’t say that this is because tech stocks or whatever are falling. This indicates a rapidly growing distaste for smaller company stocks in general as the big institutions shift their portfolios to the bigger, supposedly safer stocks in the Dow Jones and the S+P 500, and away from Nasdaq and RUT.

But whatever the reason, I will be watching this closely for you because it’s hard to contemplate trouble in the Nasdaq or RUT not spilling over to the rest of the market.

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