Stocks have been trading in a very narrow range despite making new all-time highs (some of the indices). Usually when markets are range bound for an extended period of time, a breakout is on the horizon and the big question is which way.
Since the daily chart did not provide me with the clues I was looking for, I went over to the higher multiple time frame of the weekly chart and decided to analyze the mini Russell 2000 as I feel it has been somewhat of a leading indicator for the overall stock market.
What I see on the weekly mini Russell 2000 chart below is a major sell signal confirmed by two different methods I personally have confidence in. One of these is a proprietary indicator I developed, the other is Elliott Wave.
What you see above is a sell signal in the form of the red diamond, which looks for extreme overbought with a potential for a reversal. This is followed by a completed 5th wave (Elliott Wave Theory). The way I studied EW, completion of confirmed 5th wave has a good potential for a retracement back to the previous major 4th wave. In this case we are looking at possible 1038, which was the low made Oct 2014.
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If you are primarily using futures, I would look to sell either on a bounce higher, possibly the 1235 area OR wait for a break below the psychological 1200 level. My preferred method for this set up is to look for vertical put bear spreads. Buy a put option close to the money and sell one that is out of the money.
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Disclaimer – Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. Past performance is not indicative of future results. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.
About Ilan Levy-Mayer
Ilan Levy-Mayer has been a commodities broker for over 16 years and holds an MBA in finance and marketing from the Hebrew University in Jerusalem. Ilan is currently the vice president and a senior futures broker overseeing Online Future Trading Platforms and Commodity Futures Trading at Cannon Trading Company.