Securities Research Services

Thursday, January 11, 2007

Small Caps Ready to Join the Tech Rally

Last week we outlined our reasons why the small cap sector was gearing up to lead the market higher after underperforming the blue chips during the entire fall rally. The IWM (Russell 2000 ETF) then proceeded to break down instead of higher seemingly nullifying our prediction.

That was last week. This week the IWM has caused eager shorts a great deal of pain as it has refused to follow through lower. Instead, the breakdown has reversed and can now be considered a failure as can be seen below.

But what happens when a stock or an index rallies back up after a breakdown fails? We need look no further than the current market leader QQQQ to see. Note the failed breakdown in late December in the QQQQ chart below. Now the QQQQ is powering higher and is threatening to break out to multi year highs. Look for a similar development in the IWM to ensue.

What happens if the IWM starts to move? We should start to see some nice fast moves in some of the lower priced stocks. This is something we have yet to see in this rally, but it looks promising.

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