Bullish in­dex po­ten­tial

The charts of two in­dexes in­di­cate that they could be poised for a sus­tained rise

Financial Mail - Investors Monthly - - Analysis: Technical -

This month’s tech­ni­cal anal­y­sis high­lights two charts that are both po­ten­tially poised for pow­er­ful break­outs to the up­side, and if the break­outs oc­cur, they could jus­tify a rally of at least a fur­ther 10%.

The first chart is the Rus­sell 2000. This is an in­dex in the US that tracks small cap stocks on the New York Stock Ex­change. The in­dex has been trad­ing within a side­ways range be­tween 1 110 and 1 210 for the bet­ter part of the past year. It has bumped up against the up­per bound­ary of that range on a num­ber of oc­ca­sions dur­ing the year but has not man­aged to breach the 1 210 re­sis­tance on a sus­tained ba­sis.

What is in­ter­est­ing to note is that the lower bound­ary of the range was pierced in Oc­to­ber last year. But that break to the down­side did not last long and buy­ers stepped in ag­gres­sively to take the in­dex back in­side the range, mean­ing that the break down­wards in Oc­to­ber was a false break. When a false break oc­curs within a side­ways trad­ing range as we’ve seen here, it of­ten re­sults in a pow­er­ful break to the op­po­site end of the range. In this case that would im­ply a high like­li­hood of a break to the top of the side­ways range. A break be­yond 1 210 would be a bullish devel­op­ment and would open a mea­sured medium-term tar­get of 1 320 — 10% higher than where the in­dex level now.

Small cap stocks are of­ten late­com­ers to a bull mar­ket. If that the­ory is to hold true in this in­stance, then it is quite likely that the Rus­sell 2000 in­dex of small cap stocks will need to play catch-up to the S&P 500 and Dow Jones industrial av­er­age which have both put on a good show over the past year while the Rus­sell 2000 has been trad­ing side­ways.

In­vestors who wish to take ad­van­tage of a po­ten­tial break­out on the Rus­sell 2000 in­dex can do so through the iShares Rus­sell 2000 ETF which is listed in New York. This is an ex­change traded fund that tracks the per­for­mance of the Rus­sell 2000 in­dex.

An­other chart poised for a po­ten­tial break higher is the FTSE 100. This in­dex rep­re­sents the largest 100 stocks on the Lon­don Stock Ex­change. Like the Rus­sell 2000, this in­dex has been track­ing side­ways for the past year in a range be­tween 6 200 and 6 900.

This side­ways range rep­re­sents a cor­rec­tion in time for the FTSE 100 as op­posed to a cor­rec­tion in price. This lengthy side­ways cor­rec­tion in time is deemed to be healthy as it al­lows earn­ings to grad­u­ally catch up with the level of the in­dex, mean­ing that the val­u­a­tion of the in­dex is now “cheaper” than it was at the time when the con­sol­i­da­tion be­gan a year ago. This in­creases the po­ten­tial for a rerat­ing in the in­dex level to the up­side. From a tech­ni­cal per­spec­tive, the 6 900 level rep­re­sents sig­nif­i­cant over­head re­sis­tance that has been tested sev­eral times over the past year.

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