RUSSELL 2000 provides a higher reward lower risk opportunity for bulls

When Asia breaks…better not be a bull..
May 20, 2014
Το Χρηματιστήριο μετά τις εκλογές
May 26, 2014

With S&P just 2 points away from its recent all time highs and DJIA following closely, the distance from their important support levels that could be used as a stop-loss for a new long position is quite forbidding. So what if this upward move is equities continues? Where should investors focus if they decided to enter long now? With the RUSSELL 2000 lagging behind and not having followed the rise in SPX and DJIA we prefer to be bullish IWM or RUT than SPX or DJIA.

In the chart below I show how far behind RUT has been left and if the bullish momentum is maintained, I expect RUT to outperform relative to SPX. Taking also into consideration how far from current prices is the stop-loss a bull should use, we observe that RUT is just 4% above its stop at 1080 while the S&P is about 8% away from the relative low at 1737.

RUT

My two bullish candidates therefore are shown separately below. Bullish RUT with 1080 Stop.

russell2000

Or long IWM with 106.99$ stop.

iwm

Both are expected to move higher towards at least their Ichimoku cloud resistance levels. If the bullish momentum is maintained, I believe we should expect higher highs in both RUT and IWM. S&P as shown in the chart below is holding above support but a warning comes from the divergence in RSI and this shows me how fragile the rise in price is.

  SPXD

Many people talk about an ending diagonal in the major indices while NDX and RUT have already broken downwards and the top is in. In that case, bulls at current levels in RUT and NDX will have less to lose than going long now in SPX or DJIA. If this bearish scenario does not come true, the potential for profits is bigger for the indices that are lagging behind.

 As always, thank you for taking the time to catch up on my thinking.

Alexandros Yfantis
Alexandros Yfantis
Fascinated by financial markets, studied International Securities Investment and Banking in the UK, works as a Portfolio Manager in Greece and runs a technical analysis website. Enjoys travelling and spending time with his family and preparing for the black belt in Korean Karate.