Many technical analysts keep a close eye on more volatile small-cap stocks to gauge risk appetite in the U.S. equities market.
Tarquin Coe at Investors Intelligence notes that the U.S. small-cap iShares Russell 2000 (NYSEArca: IWM) is faltering somewhat on a relative basis against the S&P 500.
“Underperformance from the small caps is indicative of a weakening marketplace,” Coe wrote in a newsletter Wednesday.
He said the small-cap ETF has created a bearish consolidation after the summer’s big drop known as a “flag” pattern. [Traders Eye S&P 500 Flag]
Meanwhile, the sideways range in the S&P 500 is extending into its sixth week, Coe added.
“The longer this continues, the more time indicators have to correct from oversold. Consequently, when the flag activates there will be plenty of slack rope in the system to allow a deeper leg lower,” the technical analyst wrote. “Coupled to a break through the floor of the flag, a roll-over by momentum indicators would also provide evidence that a reassertion south was underway.”
The iShares S&P 500 (NYSEArca: IVV) gained 1.4% on Wednesday, while the small-cap ETFs climbed 1.8%.
iShares Russell 2000
