The following post is for educational purposes only and is not a reccomendation to buy or sell any stock, ETF, or other investment vehicle. You must do your own due diligence.
Using what I call the 5/10 method, IWM has flashed a new buy signal in the daily charts. There was a time when I traded IWM exclusive of other indexes but the volatility of this ETF finally got to me and I switched to the Q’s and the $SPX. Even though I’m agnostic on the current market situation and even though I’ll be waiting on a signal in the weekly chart before I feel comfortable, I can’t deny that there may be an opportunity for a long-side trade in the $RUT, based on the 5/10 method. However, a trade in this current market environment must be monitored diligently and if you blink at the wrong time you could find yourself in a painful upside down position.
The core of the 5/10 method are the two different stochastics. As you can see on the chart below, the ‘buy’ signal, marked in green, comes when either or both of the sto’s rises back above 20 and the ‘sell’ signal, marked in red, comes when either of the sto’s drops back below 80. The long-side trade is confirmed when the 5 EMA rises above the 10EMA. You can also watch the 60min charts using the 13/34 method as another point of confirmation.
The 50MA on the chart below is just used for reference and since the 50 is pointing down it indicates that this particular trade carries a great deal of risk.
Now, the chart below shows that the first part of the criteria for this trade is confirmed. Both stochastics have climbed above the 20 line and I have marked this with a green line. However, the red lines on the chart mark the various ‘sell’ signals and recent history suggests that the long-side trade for IWM may only last 3-4 more days and could unwind at any time.
As of the pre-market on 9/27/2011 I have no intention of taking this trade and will watch from the safety of the cheap seats, but, if things really do start to improve and if the current market move turns out to be more than just a short squeeze/sucker’s rally, well, then that’s another story.
Chart courtesy of StockCharts.com
Be very careful. In this market, small positions with tight stops work best.