The Small Cap Index Likely To Outperform

03/11/10 02:05:00 PM

by Chaitali Mohile

After breaching the resistance, the S&P 600 Small Cap Index entered a healthy uptrend.

Security: $SML
Position: Buy

An intermediate downtrend of the S&P Small Cap Index ($SML) was reversed by a single bullish reversal candlestick pattern -- the hammer in Figure 1. An oversold stochastic (14,3,3) and bullish crossover of the moving average convergence/divergence (MACD) (12,26,9) also supported the candlestick formation. The index soon violated the previous high resistance and established strong support. The support/resistance tool line in Figure 1 shows fresh support for $SML. After the upward rally of 25 points, the index consolidated, forming a bullish flag & pennant continuation pattern. The breakout would hit a target of 335 - 310 = 25 + 335 = 360 levels.

FIGURE 1: $SML, DAILY

Graphic provided by: StockCharts.com.

The bullish force in the rally ignored the resistance at 345 levels that would have formed a short-term double-top formation. We can see in Figure 1 that the index has moved closer to its target of 360 levels. However, the indicators are still healthily bullish to carry the rally higher. The average directional movement index (ADX) (14) is likely to enter in the developed uptrend above the 30 levels. The stochastic oscillator is flat in an overbought region and the positive MACD (12,26,9) shows strong bullish momentum in the rally. Thus, $SML is likely to continue its bullish path even above its short-term target of 360 levels.

FIGURE 2: $SML, WEEKLY

Graphic provided by: StockCharts.com.

An upward journey of $SML is ready to breach its long-term moving average (200-day MA) resistance on the weekly time frame in Figure 2. An upper trendline of an ascending triangle would be an immediate target for the breakout. The stochastic is ranging in a bullish area between 50 and 80 levels, indicating a shaky rally. Therefore, $SML is likely to move within the channel range. However, the weak trend reflected by the ADX (14) below 15 and the tangled MACD (12,26,9) would impose volatility in the price rally. Hence, establishing support at 200-day MA would be highly essential for $SML to maintain the bullish force.

The upward breakout of the ascending channel would hit another bullish breakout that would lead $SML to the resistance at 400 levels (2008 high). Thus, in the current rally $SML is likely to outperform.

Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company:	Independent
Address:	C1/3 Parth Indraprasth Towers. Vastrapur
	Ahmedabad, Guj 380015
E-mail address:	chaitalimohile@yahoo.co.in
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The Small Cap Index Likely To Outperform

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