Last August, I wrote this piece looking at why small caps were due for a 30% increase. The bottom line is sentiment was very skeptical and the IWM was in the process of completing a huge head-and-shoulders pattern which projected much, much higher prices. Here’s the chart I used at the time.
Well, yesterday this target was hit as the IWM again broke out to new highs. Here’s the latest.
Now, one concern is October/November it did break back beneath that neckline, before eventually clearing it in December. None the less, these bigger picture charts aren’t perfect by any means and once it got back above the neckline the bullish pattern was back on.
I don’t know of too many indicators that were looking for a 30% move and were right, so it could be important to look at what I said back then to try to learn from it.
To me, layering on sentiment along with the technicals is what worked. Price action is very important, in fact, price is all that pays. Still, if you can get a good read on the sentiment, that could give you just that much more of an edge.
First off, there’s one thing I’d like to get off my chest: Isn’t it interesting how quickly we tend to hear about all the bearish patterns that are forming, while hearing very little regarding any bullish patterns? From rising wedges, to double tops, to poor breadth, it seems like that’s all I ever read about regarding technicals. I’ve talked a lot about how negative market sentiment is right now and how this bodes well for a prolonged rally. Speaking of which, maybe when we stop calling rallies a “melt-up” and call them a “bull market,” we will be closer to a top. But as long as we keep referring to higher prices as a “melt-up,” I think this backhanded compliment has bullish contrarian implications.