Wednesday, May 07, 2014

Daily Market Commentary: Small Caps Breakdown Before Large Caps Breakout

In the tug-of-war between bulls and bears, bears were able to make a substantial pull in their favour with the Russell 2000 undercut of the 200-day MA. However, bulls aren't defeated yet as they still have 20-day and 50-day MA support to lean on as part of potential breakouts for the S&P and Dow, but their task has become a little more difficult after yesterday.

The finish in the Russell 2000 looked ugly, as the close was equivalent to the low of the day. The index has also struggled to mount a challenge on its (overhead) 20-day MA; an area of attack for shorts.  The February swing low is still available for bulls to try and mount a defense, but demand will need to pick up sharply if it's to succeed.  The Russell 2000 is also suffering from a significant flight of participants, noted by the sharp relative swing away from the index towards Tech and Large Caps, since the end of April.


The Nasdaq also finished the day at the low, but it also held the 20-day MA, and is well above the 200-day MA and February swing low.  The higher volume marks distribution, but it's slowly gaining relative ground against the more bullish S&P.  The index is occupying the middle ground, and hasn't offered itself one way or the other.


The S&P and Dow were left deflated after Monday's recovery had looked like the precursor to the breakout.  While Tuesday's loss didn't violate any support, it also hasn't negated the potential for a bearish head-and-shoulder reversal. Both indices are in wait-and-see mode, with April swing lows looking like they will see another test. However, 50-day MAs are the bullish front line for now.


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Dr. Declan Fallon is the Senior Market Technician and Community Director for Zignals.com.
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