Small Caps Should Continue to Trail Blue ChipsŠwhile Nasdaq Q's Have Short-term Upside
Stock-Markets / US Stock Markets Dec 18, 2007 - 01:48 AM GMTBy: Mike_Paulenoff
Well, time to dust off the daily QQQQ chart again, which shows the major
channel the Q's carved out from the July 2006 low to the October 2007 high.
My preferred scenario argues (still) that the November 12 low at 48.75 ended
the first portion of an intermediate-term correction that eventually will
resume its decline towards a test of the lower channel support line, now in
the vicinity of 47.30.
"Eventually?" Yes, because from the November 12 low, both my pattern and
oscillator work indicate that the initial rally to the December 11 peak at
52.84 represented the first phase of an "intervening recovery rally" that
has unfinished business on the upside into the 53.00 area prior to the
plunge towards the lower channel support line.
If that proves correct (more difficult to justify after today, perhaps), then the Q's must turn almost immediately and embark on another potent, oversold advance (to 53.00).
While the Q's move lower intermediate-term, we also expect small caps to continue to underperform big caps. For over one year now, I have been positioned -- long the big cap DJIA (DIA ETF) and short the small-cap Russell 2000 (IWM) -- to take advantage of this relative appreciation of big caps vis-à-vis small caps. As seen from the chart, this DIA/IWM ratio of the two has carved out a huge base formation during the 2005-2007 timeframe.
The upside breakout in the DIA/IWM ratio from the base occurred in July above 1.6500, and is near my second optimal target of 1.8200. Before this process is complete, however, I fully expect the ratio to climb the "right side of this chart" to create a mirror image of the 2002-05 decline.
If for no other reason, then the increasingly restrictive credit conditions that have pervaded the U.S. economy will hamper growth prospects in the small cap space much moreso than the big caps.
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By Mike Paulenoff
Mike Paulenoff is author of the MPTrader.com (www.mptrader.com) , a real-time diary of Mike Paulenoff's trading ideas and technical chart analysis of Exchange Traded Funds (ETFs) that track equity indices, metals, energy commodities, currencies, Treasuries, and other markets. It is for traders with a 3-30 day time horizon, who use the service for guidance on both specific trades as well as general market direction
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