Scanning the charts and looking visually at what is taking place there is a lot of similarity as the current base is being built. The 20 day moving average is the key point to move above currently, downtrend lines are being broken, and the 10 day moving average is turning positive. This means nothing more than the short term is turning positive. This is a short term trading opportunity. The upside technically has the potential to move to the resistance points on just about any chart you look at currently. The Dow, which we discussed last week, shows a resistance point at 10,350. Bottom line is we are in a period of buying and the more money jumps in the higher we will go. I don’t expect this to last long and thus the need for trailing stops on all plays taken short term.

Today I want to look at a chart that caught my eye while scanning through the indexes. The Small Cap index as measured by the S&P 600. The selling last week broke below the October 10th lows both intraday and on the close. This index is an indicator for growth looking forward. Simply put when investors are optimistic about the future growth of the economy small caps outperform on a relative bases. Last week the bounce off the low at 239 produced a 20% bounce. That is significant from two views. First, it showed leadership for the major market indices and second, it gave some validity to the recent low bounce. I am not saying we are out of the woods, the bottom is in, or the bear market is over. I am simply stating the current bounce in play was confirmed by this move technically last week. The target for the small cap index on this bounce would be 340. Last week’s move above 281 was the entry point for a short term play. This is worth watching to short term to see how it plays out as the small cap index will provide some answers to the upside or downside movement.



Below is the chart for IJR which is the iShare S&P 600 index ETF. The same data points are reflected on the price of the ETF. Remember, you must define your entry, exit and target based on the strategy you implement. To learn how I would play this click here.

Jim Farrish, founder and editor of Melbourne, Florida-based SectorExchange.com, writes regularly about sectors and speaks widely about investing and money management.