Jeff Cooper: What Tesla's Breakout Says About Animal Spirits; New Pattern Forming in the Russell 2000
Is a head-and-shoulders pattern forming in the Russell 2000 Index?
Tops typically take time to form. Spike tops are less common than spike bottoms. Tops are usually marked by extreme fluctuations in small-and-mid-cap stocks.
The wide and loose trading range of the Russell 2000 (INDEXRUSSELL:RUT) this year encompasses extreme movements in many medium-and-small-cap glamour stocks.
Daily RUT Chart for 2014:
Last week's RUT high ties to its February pivot high. Subsequently, the index turned the important 3-Day Chart down on Friday. On Monday, the daily chart turned up on trade above Friday's high. Any trade above Monday's high today will put the RUT in the Minus-One/Plus-Two sell position. A sell setup from current levels on the RUT looks significant. Why? Last week's high ties to the January peak and may be building a right shoulder of a Head & Shoulders top in the RUT. Additionally, last week, the RUT was repelled from a declining trendline off the March high.
Annotated Daily RUT Chart:
In the first quarter, I flagged in the March 7 Daily Market Report a possible time-and-price square-out in the first week of March for the RUT. Remember that the first week of March is 90 degrees square a price of 1212. The high the first week of March was 1212. Last week, the RUT was straight across and opposite 1212. Is price pointing to time and time pointing to price? This is the meaning of a time-and-price square-out. Remember that the bull market high on the S&P 500 (INDEXSP:.INX) in 2007 saw this precise relationship, with 1576 being 90 degrees square early October, the timeframe of the high in 2007. From the early October 2007 record high, 90 degrees was early January 2008, when the market started down in earnest.
Since the RUT is 90 degrees in time here in June from what may have been a major square-out in March, the price action at this juncture must be gauged carefully for any change in trend, for any stumble.
RUT Square of 9 Chart From the March 7 Daily Market Report:
Click to enlarge
RUT Daily Chart From the March 7 Daily Market Report:
The first week of June is 90 degrees and days from the first week of June, which is a natural division of the year and a good reference point for determining whether the trend is still up or whether a return rally test of the high is playing out.
Weekly RUT Chart:
Note that the record high week of March 7, 2014 was a "bullish" outside up week. However, there was no upside follow-through. The stab down below that week's low that occurred during the week of March 28 left a weekly Reversal of a Reversal sell signal. That level and sell signal are being tested three months later here in June. So, the RUT may be carving out a right shoulder on a return rally failure. I think it important that this potential right shoulder is underscored by a backtest of a broken weekly trendline since 2013. Likewise, last week's high ties to a possible bearish backtest of a declining trendline off the March high.
Did a turn up in the 3-Week Chart last week on the RUT define an important high? If this is indeed a bearish corrective rally, then the answer is yes.
Notably, two weeks ago, the RUT traced out a bullish outside up week. The bull and bear pivot is clear from here: trade back below the outside up week from early June will trigger another Reversal of a Reversal sell signal. This will occur just above the 50-week moving average, which ties to the important wide-watched 200-day moving average. The presumption is a second break of this moving average, following the recent rally attempt, will confirm a change in trend and confirm a right shoulder has been installed.
Conclusion: Tesla's (NASDAQ:TSLA) breakout yesterday may be a good tell for current speculative sentiment.
Daily Tesla Chart:
It is worth noting that the large-range breakdown on May 8 marked a low. There was no downside follow-through. It will be interesting to see if there is upside follow-through from Monday's up-spike, especially as yesterday's highs tie to a Live Angle coinciding with the early May selling climax. A buying climax here in Tesla may sound a bearish note of caution for animal spirits.
Form Reading Section:
Zendesk (NYSE:ZEN) 10-minute Chart:
Zendesk Daily Chart:
Daily First Solar (NASDAQ:FSLR) Chart:
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