Strong earnings reports on Tuesday helped drive the major stock indices higher, but the lack of follow-through to the upside overnight suggests that short-covering rather than new buying may have been responsible for the bulk of the rally. This may have been the case for the March E-mini Russell 2000 index futures contract.
The two large-cap indices, the March E-mini S&P 500 and the March Dow Jones Industrial Average futures contracts challenged last week’s high with the S&P exceeding it by two ticks. The Russell 2000 closed higher but the range was inside of the previous day’s range. This was hardly a vote of confidence for higher prices.
The divergence between the large-cap and small-cap stocks could be suggesting that a correction led by profit-taking could be in the making. The price compression taking place in the Russell 2000 suggests that a volatile move is imminent. Since the upside potential is relatively unknown, investors may shift their focus to the downside and potential value zones before taking the market higher again.
Technically, the short-term range is 891.10 to 912.00. The pivot price of this range at 901.50 is controlling the short-term direction of the market. Shortly before the opening, the Russell 2000 is testing this level. With an overnight bias developing to the short-side, don’t be surprised if the first move is down shortly after the opening.
The main trend is up on the daily chart. A trade through 912.00 resumes the uptrend while a break through 891.10 changes the main trend to down. The first down side targets are a pair of uptrending Gann angles at 873.10 and 872.10. Although there may be a technical bounce following the first test of these angles, the damage will be done to the uptrend so a further decline may be inevitable.
A change in trend to down will indicate that prices are too high and that investors will be looking for value before re-entering. Based on the range of 823.10 to 912.00, the best value zone will be the retracement area bounded by 867.60 to 857.00. A test of this zone is likely to attract fresh money.