Bullish Engulfing on Russell 2000 ETF

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The indexes look to be in a solid short-term bullish set-up here. The Russell 2000 and Nasdaq have both undercut first support on this decline. The S&P and Dow have not. For those that have followed the blog for quite a while may recall prior posts highlighting the break of the first support as a target after an intermediate high. Often that support is undercut and then there is a rally back to the middle of the leg down from the top. On the IWM etf above that would translate to a move back to the 59 area.

The index etf's basically formed doji/harami's yesterday indicating indecision and possible consolidation or reversal ahead. Today, they mainly formed bullish engulfing patterns of yesterday's small real bodies. So short-term I think the odds favor a bounce, which is why I suggested the trade on SSO.

There is as FOMC announcement tomorrow afternoon, so there could be a large market move. Also, recent history would suggest likelihood of a gap up in the morning. I expect to exit the SSO trade tomorrow at some point, and possibly reverse the trade back into SPXU if conditions look good. From an indicator standpoint I think a choppy range would be likely for several days at least. Also, for anyone new, there has been a very consistent tendency for FOMC day strength to be reversed over the following 2-3 sessions, so in the event of a large gain tomorrow, that would be an added historical tendency to support consideration of a new bearish trade. In the event that the market moves down substantially, it will be important to see if any new lows get reversed back into the recent 3 day range quickly before reconsidering a bullish trade.

On an intermediate term basis the basic trend indicators are signaling a new down trend in stocks. Both the DMI and Aaroon indicators show bearish trends in the Russell 2000. Also the Bollinger bands are in the most bearish configuration. They are expanding with multiple recent closes below the bottom band after a horizontal channel and double top price formation. The text book target for the double top would put the IWM etf above down into the 53 to 54 region which is just under next support. So that may be a level to keep an eye on for any shorter term traders.

For what it's worth, I think the price action and pattern on this chart suggest that price is likely to move back to or below the July lows some time this month or early next month. Obviously we'll take it one step at a time, but whenever you see price completely retrace a leg of the prior
trend in less time than it took to form, you are usually looking at a larger trend change.

Also, historical studies I referenced in July and August suggested that after periods of such incredible trend persistency the norm was for them to experience very sharp declines that nearly or completely wiped out all those gains in a short period of time. In the Chinese market we saw it happen a few months back, and on the Russell 2000 chart above we've already seen the last 2 months of gains erased in 2 weeks. There is still some work to be done in that regard on the S&P and Dow, so I still expect further sharp declines, though at least a brief rebound looks likely.