The small cap sector showed some leadership today as the index moved through the 1190 level of resistance and staged a run at the previous highs of 1220 closing at 1200. In December we put money to work in the sector as it ran through the 1190 resistance only watch it retreat as the new year began resulting in a break-even on the trade. Thus the risk of the current market environment an the choppy news driven trend. Today offered another opportunity to put money to work in the sector on the move higher. However, the challenge comes with the lack of clarity in the broader market indexes. That is something I discussed at length in our weekly update this weekend and it remained a challenge today as the elections in Greece kept the markets in check most of the day. The chart below of the Russell 2000 Small Cap index show clearly the consolidation range it has been trading in for the last three months. Risk of the trade from my view is an 1175 stop on the 1195 entry or 20 points. The target is a move to the 1240 mark short term or a 45 point gain… that is approximately 2 to 1 risk reward for the index to move.
The sister to the small caps is the Midcap sector and it showed an equally strong move to the upside both last week and today. This type of leadership from the two sectors in unison is a positive from my view at this point. The chart below of the S&P 400 Midcap Index shows and equally positive outlook short term. The key difference in the two charts is the Midcap index is showing a positive up trending channel for the index and the previous high is 1474 only three points from the close today. This leadership will be important if the bounce off the lows from last week finds momentum on the upside to resume the previous uptrend off the October lows.
Simply put, in a day that lacked direction and follow through, we found some positives in the two indexes. Going forward there is still plenty of work to do for this market to regain confidence and the clarity relative to future growth. On the way to that objective it doesn’t preclude the market from offering trading opportunities in the developing leadership. Tomorrow we want to see this follow through and the upside gain strength.
Overall I will still say the primary view is choppy at best with a bounce off the lows from last week still in play. We will take it one day at a time and continue to look for each opportunity the market offers such as those discussed above. Swing trades are challenged by the news driven environment such as Greece’s vote over the week impacting the open today. Using disciplined entries, stops and targets is key in this environment and you have to expect or anticipate you may get stopped out if you fail to manage your positions before the open each day. News driven markets are susceptible to gaps at the open that can damage your positions on to reverse after the open.The reason for higher risk in this environment is tight stops will generally get taken out quicker if we fail to manage those positions daily, thus giving a wider spread to allow for the volatility opens you to greater losses if the markets go against the position. That is both the challenge and risk of trading in this current environment. Sometime it is better to wait and let the chop subside and trend define itself going forward.
Tomorrow is another day and we get the added benefit of economic data hitting the headlines along with the earnings parade continuing down main street. Manage your risk and only trade where you can define your risk and it is a risk you are willing to take.