Are Small Caps in Trouble

In the middle of August the Russell 2000 broke out of a 2 month consolidation to the upside. It continued to push higher through the end of August. Profit taking the last day of the month was seen as a healthy and digestive move. But in hindsight it has now moved lower ever since that day. Is the Russell 2000 in trouble of rolling over and diving lower?

The chart below suggests that the path of least resistance in the short run indeed may be to the downside. After a retest of the break out area the Russell 2000 ETF ($IWM) has continued to drop and is now back near the heart of the prior consolidation. This could be a new trend lower. The RSI is falling and now at the lower edge of the bullish zone and the MACD is dropping and about to cross to negative.

There are some extenuating circumstances though to take note of. First, the drop has yet to make a lower low. Until it breaks the July low the trend of higher highs and higher lows continues. Second, those momentum indicators are not yet in bearish ranges. The 100 day SMA below has not been touched since early May and a reset there would be healthy.

Finally the 3rd quarter ends Friday. Any shenanigans in the options market from hedging around the quarter end could be playing a big role. This may be the start of a change in direction. but lets wait until at least Monday and the start of a new month and quarter to decide.

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