While US stocks – since the bottom of March at least – have given investors the best returns in decades, year-to-date performance has been mixed. Within that framework, small cap stocks, as noted on the, showed the largest performance differences over the two time frames.
Below the results for the four main US benchmarks between those time frames:
A very glaring anomaly: Although the Russell 2000 was the second best performer since the bottom of March, it is by far the biggest laggard on a year-to-date basis.
Likewise, it has completed an upward breakout of a bullish pattern, and in the same way, we bet that the Russell 2000 will soon close the YTD gap and break out of the same bullish pattern that the Dow recently completed.
It doesn't hurt that small caps, which are currently undervalued, now offer investors more growth opportunities. Institutional investors notice this. According to Lori Calvasina, lead strategist for RBC Markets in the US, we are now seeing a “historic valuation opportunity” in setting up small cap stocks that will outperform in 2021.
From a technical point of view, the picture of supply and demand also looks quite optimistic.
The benchmark completed an Evening Star, which also confirms Tuesday's hanging man. However, the bearish advantage was taken out of these patterns due to the insignificant rally that preceded them, a 1.9% gain between Friday's low and Tuesday's high – which didn't bring much either.
The more critical technical signals are the general trading pattern of a falling flag – bullish after rising 10% in just eight days. It pulled the 50 DMA over the 200 DMA, activating the so-called Golden Cross, which also forms the flagpole.
The fact that the flag coincides with the upward trend since the bottom of March 20 – the bottom of a rising channel – increases the likelihood of an upward breakout.
The body of the flag is created when investors who have enjoyed the previous sharp upward move pay out money, which is why the price is sloping down. However, new demand supports it and keeps it from falling, causing the price to rise. When demand absorbs all the available supply, it is forced to make offers to find less compromising sellers at higher prices.
The fact that the flag is formed at the very bottom of a rising channel is an arrangement of supply and demand with prices returning to the top of the channel.
Investors expect the upward breakout to repeat the same rally that preceded it, 146 points from the start of the breakout. If realized, the price would test the pre-COVID-19 level again.
Trading Strategies
Conservative traders should wait for an upward breakout whose range should exceed 1,603.60 of the flag, with at least 3% of the point of breakout is removed, as well as a 3-day filter, preferably including a weekend, to sift out a bull trap. After that, they would wait for a likely return move, after the short squeeze ends and the longs make a profit, and take their own long position with evidence of sustained demand above the flag.
Moderate traders can be satisfied with 2%, 2-day penetration, to reduce the chances of being knocked out of a long position.
Aggressive traders can risk an immediate long position to beat the crowd, provided they understand that the flag's bullish signal is only triggered on the upward breach, which is when the herd is storming.
Trade Sample – Aggressive Lung Position
Input: 1,550
Stop-loss: 1,530
Risk: 20 points
Target: 1,650
Reward: 100 points
Risk: Reward Ratio: 1: 5
