The Russell 2000’s Relative Strength

Andy Waldock  |

Every one of the major U.S. stock indices has sold off more than 10% in the last week. This will finally put an end to the, "But the market is due for a 10% correction" argument. I began trading in the S&P 500 pit in the early 1990's. Therefore, it has been my experience that I can make more money on the long side of the equities, more often than I  can hoping to catch the major downdraft. The S&P 500, the broadest and biggest of the indices knocked out a year's worth of gains in three days. Now that we've gotten the drop, let's see what we can buy.

We trade the Dow 30, S&P 500, Nasdaq 100 and Russell 2000 stock indices. Each of these markets has declined more than 10% in the last week the Dow - 12.6%, S&P - 12.6%, Nasdaq - 14% and the Russell - 11.6%. I'd begun to notice the Russell's relative strength recently as day trading the Russell from the long side and the S&P from the short side had been the best combination as these markets had been stuck in a 5% trading range since February. Now that we've blown that out, we can look at establishing some long positions heading into the September contract's expiration.

Commercial traders are strong buyers of the Russell 2000's decline and their actions have been quite successful this year.

Recent commercial trader net buying across the stock indices has shifted their momentum to the buy side in all but the Nasdaq which, not surprisingly was the weakest of them all over the last week. We'll focus on the Russell as it has provided the greatest relative strength in the face of the sell off and has shown to be the commercial traders favorite having been buyers in each of the last four weeks and seven out of the last eight.

All of the criteria have been met to create a Cot Buy Signal. Commercial trader momentum is positive and the market is oversold on a short-term basis. Should today's bounce hold, it would create the reversal we're looking for to buy the Russell 2000 stock index futures. This market trades $100 per full point move and carries a margin of $3,740. Should the market close at its current price of 1148, this would create a risk of $7,250 per contract down to yesterday's low of 1071.60. That's a LOT to risk on one trade however, we've shown time and again how the stock index expiration pattern plays out. That being said, we believe the Russell could easily return to the 1250 -1300 level where it has spent much of the year, thus far.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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