Russell 2000 Flashes Bullish Signals

10/20/2011 9:00 am EST

Focus: STOCKS

Donald Pendergast

Founder, Linear Trading Systems LLC

Every market finds an enduring bottom at some point. Here’s one way to help identify the start of a new bull market.

It’s been quite a ride for equity (not to mention commodity) market investors since mid-summer 2011, what with the panicked selloff action in July and August and then the back-and-forth indecisiveness of September and October on top of that.

However, now that all of the broad market indexes have finally closed above their respective 50-day exponential moving averages (EMAs), the market equation is slowly starting to shift toward the bullish side of the equation. Here’s a brief look at the current technical set-up in the Russell 2000 index.

chart
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While even the best-looking market set-ups can fail, it still pays to be prepared with a list of high-relative-strength stocks firing buy signals should the Russell 2000 index soon take out September’s high of 718.63.

One of the first things a technician would notice on Figure 1 is, as previously mentioned, the daily close of the Russell 2000 above its 50-day EMA (the 50-day is at 696.89) and that the daily price bars have turned from red to blue, as interpreted by the CS Scientific Hybrid trade screen in MetaStock 11.

Market forces are apparently going to at least try to make a run at the widely anticipated year-end (seasonal) rally, and the .RUT is now only six points away from meeting and/or exceeding September’s swing high of 718.63, giving bullish traders a few extra reasons to load up on high-momentum, high-relative-strength stocks ahead of such a possible move higher.

The green shaded area on the chart is an area in which to expect a rapid price rise, especially if the September swing high is taken out on a daily close—preferably sooner rather than later. A potential run-up to the 200-day EMA will also bring both moving averages into closer proximity, helping pave the way for a possible “golden cross” (where the 50-day EMA crosses above the 200-day, a major signal for big institutions to go long the market)—something that the bulls have long been waiting for. Bulls should be busy preparing their short list of quality stocks; stocks with good earnings potential and a high 13-week relative strength ranking versus the broad market.

Stay tuned, as the final two weeks of October should prove to be exciting indeed.

By Don Pendergast of Linear Trading Systems

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