What We're Reading

As discussed yesterday in Chat, small caps appear to be forming a diamond which can represent a "top" or merely taking a rest or consolidation before resuming it's trek higher.

Theory is to trade the direction of the break higher or lower.  IWM would work for a bullish breakout and TWM for a bearish break down for those who are unable to short.

fwiw we recently traded TWM on market weakness.  Looks as though it may be setting up again.

For more information on diamonds, I would suggest you browse through Thomas Bulkowski's pages at ThePatternSite.

For a technical analysis trader or investor, you need to be able to properly identify stock patterns his book Encyclopedia of Stock Patterns is a must have.

In early October, I pointed out that the Russell 2000 (IWM or $RUT) could be forming a bullish butterfly pattern, having found buyers off of the 20month SMA.  (See here) 

Well so far so good and I'm calling it's recent consolidation a bull "flag" due to no significant breakdown in the other three indexes, nor semiconductors.

Friday we saw banks and broker/dealers make a nice reversal higher after comments were made, that while the ECB is not easing "now", they will be preparing a QE plan for their January meeting.  The U.S. 10 year popped and the banks/brokers followed in suit.

Small caps also typically outperform large caps going into the end of the year.  While the stronger US dollar may weigh on them longer term, I still believe Santa will not leave them off his "nice list" this holiday season.

While much of the equity market is extended, banks still have room to run and I feel small caps will rip to the upside and I hope to see them lead.  My next $RUT target $1300.  Stop below

Pick any one of 10 difference reasons; does it really matter?

• Autumnal solstice
• End of quarter
• End of fiscal year
• Rosh Hashanah
• CALPERS beginning to liquidate hedge fund positions
• Curreny-related pressures
• Concern over weak earnings
• Weaker China growth
• Russia's asset seizure proposal
• EU growth concerns
• China's $10 in Biliion bogus trades
• QE taper
• Plain old valuation (nah, it's never that)

It is what it is.  (Click chart to enlarge) 

Small caps are definitely looking at the edge of a descending triangle.  Long TWM was recommended on this chart.

As warned previously, SPX has now broken $1979.  I have a sell signal in SPX.  Instead of buy the dips, I will be selling the rips with cover stop (alert) above $2003.00.   Be hedged or stay on the sidelines until after October 5th.  Work on your watch list of names you would like to buy.  Determine entry and exit points.  It's about time we got more than a 2-3% pullback.

If the stronger dollar persists, this wi

Just when the (last few remaining) bears were enjoying some market wide liquidation, China apparently launched some stealth QE of their own reversing AUD/JPY and sending markets plowing over weak bears.  From Bloomberg:

• CHINA’S PBOC STARTS 500B YUAN SLF TODAY, SINA.COM SAYS
• PBOC PROVIDES 500B YUAN LIQUIDITY TO CHINA’S TOP 5 BANKS: SINA
• PBOC PROVIDES 100B YUAN TO EACH BANK TODAY, TOMORROW WITH DURATION OF 3 MONTHS: SINA

According to Government Sachs

"This amount is roughly the same as a 50 bps cut to RRR for the whole banking system on a static basis.  Still, such an easing would be consistent with our expectation that (1) monetary policy will loosened amid the drastic slowdown in activity growth and falling inflation, and (2) full scale RRR and interest rate cuts are unlikely because they would be viewed as aggressive stimulus."

Toss in a little hint dropping from the Wall Street Journal's Fed-whisperer Jon Hilsenrath that that the "considerable period" language will

No bueno....but it's great if you've been scaling into shorts. (wink)

• Variant Perceptions has been warning clients to beware of small caps as liquidity is withdrawn.  Large caps should become more in favor for many reasons, including cash on their balance sheets.