Thursday, January 04, 2007
After breaking out late last year the Russell 2000 (represented below by IWM) has been trading in a contracting triangle pattern. Contraction after a breakout and improving money flow in the sector project that small caps are gearing up for an important break higher. So far during this rally, blue chips have been the market leaders. If the IWM does indeed break higher here, the baton will be passed along to the small caps, creating new opportunities in some of the faster moving, higher beta stocks.The new year started off with a wild ride as stocks first made high volume gains on program trading, only to reverse and go negative before closing virtually unchanged. The swings were hard on stop losses, but did virtually nothing to the trend. If indeed we are correct about the small caps, then yesterday's low should be the ultimate near term low and stocks will now be free to continue higher.