![\"chart\"](\"https:\/\/cdn.jeffclarktrader.com\/JMU\/images\/202206\/20220608-JMU-03_ver234.png\")
<\/p>\nThe focus this year has largely been on the decline of mega-cap tech stocks…<\/p>\n
But small-cap stocks haven’t been spared either.<\/p>\n
In fact, the Russell 2000 small-cap index has taken a beating.<\/p>\n
After sustaining a nearly 31% loss from its November 2021 peak, the small-cap market has investors wondering when the bleeding will stop.<\/p>\n
While it isn’t clear whether the Russell has struck a definite bottom, the chart setup shows a potentially explosive move to the upside.<\/p>\n
Let’s look at the Russell 2000 Futures (RTY) price chart to see what I mean…<\/p>\n
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(Click here to expand image)<\/a><\/p>\n <\/p>\n I’ve outlined three important things…<\/p>\n First, we have a parallel trend channel<\/strong> (blue lines).<\/p>\n<\/li>\n If the market remains in this channel, then it’ll continue to trade lower.<\/p>\n Notice how this channel has contained RTY’s entire decline since the market topped out in November. <\/p>\n Breaking out of this channel would be a great initial sign that the market has bottomed out.<\/p>\n Second, we have a trend-following indicator – the 50-period moving average<\/a><\/strong> (MA – red line).<\/p>\n When the market is bearish<\/a>, it tends to trade below this moving average. And when the market is bullish<\/a>, it tends to trade above it. <\/p>\n That’s why it would be a strong piece of technical evidence if the market can break above the 50-period MA…<\/p>\n And it’s what I expect to see if RTY can also break out of the parallel trend channel.<\/li>\n Finally, we have my favorite momentum indicator – the Relative Strength Index<\/strong> (RSI – lower half of chart).<\/p>\n As a market nears a top or bottom, the RSI will typically start diverging from the market’s price action… as seen on the RTY price chart.<\/p>\n Although prices have steadily declined since November 2021, the RSI registered its most extreme reading at the beginning of December.<\/p>\n Since then, the RSI hasn’t been able to make a lower low and has started to trend higher.<\/p>\n RSI divergence is often a leading indicator…<\/p>\n Meaning, you’ll see divergence appear on a price chart before the market puts in a bottom and reverses. <\/p>\n That’s why it’s important to combine the RSI with other pieces of technical analysis<\/a>, to identify the highest-probability trading opportunities.<\/p>\n<\/li>\n<\/ol>\n The small-cap market is telling me the current bear market is running out of steam. This lines up with the buy signal I spotted in the S&P 500 last week.<\/a><\/p>\n If a breakout of the parallel trend channel and of the 50-period MA combine, then there could be a sustained rally over the next few months.<\/p>\n Happy trading,<\/p>\n Imre Gams<\/p>\n Analyst, Market Minute<\/em><\/p>\n <\/p>\n In today\u2019s mailbag, Earnings Trader<\/em> member Lance shares his recent gains…<\/p>\n I acted on your recent sell recommendation and made a 52% profit.<\/p>\n – Lance B.<\/strong><\/p>\n<\/blockquote>\n … And Jeff Clark Trader<\/em> member Jimson thanks Jeff, while Ross comments on his Memorial Day essay…<\/a><\/p>\n Hi Jeff,<\/p>\n It\u2019s amazing to read your lectures. Thank you so much for improving my option skills.<\/p>\n – Jimson W.<\/strong><\/p>\n<\/blockquote>\n Thank you, Jeff. This is by far your best and most important post ever.<\/p>\n\n
Reader Mailbag<\/h2>\n
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