Having a busy morning today, but wanted to get this one chart up I’m keeping an eye on….
The strength in small caps has been a topic of conversation for a few weeks now, both on the blog and on Twitter. I’ve been watching the support area in momentum for potential clues if the relative outperformance of the Russell 2000 ($IWM) will end and begin to favor the S&P 500 ($SPY). Earlier this year we saw a negative divergence in the Relative Strength Index (RSI) which lead to the RSI breaking below support and the ratio between $IWM and $SPY also breaking it’s rising trend line as large caps took the reins.
While right now we don’t have a divergence taking place in momentum, we are testing support in the RSI. Nothing has broken yet, and things appear to still favor small caps as the ‘risk on’ rally continues this morning.
You may also notice that in the trend line I’ve drawn for the current price action since April I didn’t draw the line from the May low, but a couple of weeks earlier. I did this because I want to watch the trend that has the most ‘touches’. This helps, in a way, validate the trend because we can learn where price respects support in the journey of it advancing. There’s no rule saying we must start a trend line from the absolute low!
Going forward small caps still have the market’s preference and I’ll respect that until something changes.
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