Stock Market Forecast: Small Caps And Trannies

The Small Cap Russell 2000 Stock Index Forecast:

Below we show two charts for the Russell 2000 (RUT) that tell us this is a very important price juncture for this small cap stock index. Prices sit at two critical intersections this weekend: They sit at the top boundary of a large declining trend-channel from mid-2015 (shown in the first chart below). Should the Russell 2000 rise decisively above this upper boundary line, above 1,225ish, it would blow up the declining trend-channel and be very short-term Bullish, and support the Bullish patterns we show in the second chart.

In the second chart, we show two patterns, both Bullish short-term, and both having the same upside price target, 1400ish. The first pattern is a very nicely defined Megaphone top pattern from 2014. It is a five wave Jaws of Death pattern, and if this is the correct mapping, it means the RUT is inside its final wave E-up move, but has a substantial rally leg left to travel to complete this pattern, almost 200 more upside points.

Further, we see a Bullish inverse Head & Shoulders bottom pattern in the RUT from mid-2015. This pattern was just completed and confirmed with the recent rally the past week. If this is correct, it has an upside price target of 1400ish, the identical upside price target of the Jaws of Death pattern. These are two independent patterns sending the same short-term Bullish message. We will know if these patterns will rule by watching to see if the RUT remains inside its declining trend-channel (canceling these two bullish patterns), or if it rallies above that upper boundary, thereby canceling the declining trend-channel and confirming the bullish patterns. Again, I would consider a rally above 1,225 decisive enough to support the two Bullish patterns, and conclude small caps are headed toward 1,400ish before a massive decline begins.

And this is an important point: Once 1,400 is reached, it means a final top has arrived in the stock market for years to come and a massive stock market decline will follow. It is as if we may get a grace period to prepare for what ultimately is a disaster that is coming.

The Dow Transportation Stock Index Forecast:

Trannies also sit at a critical juncture this weekend, and how they move from here will tell us a lot about the future path for Trannies. They sit at the intersection of two trend channels, one declining (intermediate-term) and one rising (long-term). They sit at the top of the declining trend-channel and at the bottom of the rising trend-channel. So, pretty much any move from here will blow up one of these two trend-channels, and will give excellent guidance for the future path for stock prices over an intermediate time period (several months).

In the chart below, you can view these two trend-channels. A rise above 8,100 would suggest the declining trend-channel is no long valid and that Trannies are headed sharply higher, perhaps to new all-time highs, toward 10,000ish. A decline below 7,900 would suggest the rising trend-channel from 2011 is no longer valid, and Trannies will lead a stock market Bear Market that lasts for many years.

For the moment, we label the Bearish case as the top possibility and the Bullish case as the alternate, however we should get clarity over the next few weeks as to which path Trannies will follow.

Reasons for the Bearish case being our top possibility are two: First, the next chart shows what looks like the completion of a huge Bearish Jaws of Death top pattern, and Trannies have declined, and remain far below, the top boundary line after a wave {E} move higher. The second reason is that Trannies have failed to confirm the new all-time high in the Dow Industrials, a Dow Theory non-confirmation, which warns that the Industrial’s rally should not yet be trusted until Trannies also reach a new all-time high. The problem is, this non-confirmation is huge, Trannies remain over 1,000 points below their all-time high. This does not mean they won’t rally and confirm the Industrial’s all-time high, it just reduces the odds.

However, a rally soon above 8,100 would go a long way in supporting the possibility that Trannies will rise above their 9,202 all-time closing high on November 25th, 2014 and confirm the all-time high reached this past week in the Dow Industrials. A rally above 8,100 increases the odds that Trannies are headed for 10,000 before a major decline begins, and a rise above 9,202 would increase the odds even more that 10,000 will be reached before a major decline begins.

Short-term, stocks are very overbought, so it will be interesting if both Trannies and the RUT can climb above these thresholds to substantiate the Bullish case while overbought.

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Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com.  The statements, opinions, buy and sell signals, and analyses presented in this newsletter are provided as a general information and education service only.  Opinions, estimates, buy and sell signals, and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice.  Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision.  Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment.  Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided. Copyright 2016, Main Line Investors, Inc. All Rights Reserved.