Now What? (by Leaf_West)

By -

Small caps are market leaders in the bigger trends typically, so if we want to assess where we are and where we are going, let's take a look at the Russell 2000 ETF (IWM).

IWM_May5, 2011_60min

Shorter term view is that we bounced right off of some important GANN support levels on the 60min chart.  The stochastic indicator looks like it could allow a continuation in the bounce.  eSignal has a trend confirmation feature in their GET software … the trading rules are to short this confirmed downtrend when the stochastic indicator breaks above the 75 level and you get signal/trigger candles.


IWM_May5, 2011_Daily

The daily chart believe it or not is still in a confirmed uptrend … 20EMA is above the 50EMA and price bounced exactly of the 50EMA this morning at $82.42.  The Ascending Triangle for the IWM actually fits more perfectly than the one I was using on the SPY last week.  If you study Ascending Triangles the "E" leg down is very scary and people get cold feet and the weak hands bail as they see a "failure" at busting higher at the end of "D".

Prepared traders actually step in at the 'E" intersection and buy.  The theory is that if the pattern fails a tight stop will keep you out of real trouble and if it works out, those weaker hands will come back to the market and help boost your profits in the days to come.

If the Pattern is going to fail it will be with a "truncated" move off of the "E" intersection.  Typically that truncation will happen before price gets 50% of the way back to the other/upper trendline … that level in this case is $84.615.

The trigger point for conservative traders is the close under today's low which at this writing is that $82.42 50EMA level.

Cheers … Leaf_West