What Happens After Extension?

Weekly Market Update July 18, 2024

The Markets

On Tuesday, the Russell 2000 Index ETF IWM hit a historic level — the RSI reading exceeded 80.

For a refresher, the Relative Strength Index is an oscillating momentum indicator that measures recent price moves. Common use calculates a 14-period look back, and reading over 70 is considered ‘overbought,’ while under 30 is said to be ‘oversold.’

When it hit 80.85 Tuesday it reached a level only seen three previous times since the beginning of the data in May, 2000. Naturally, I went to the charts to see what had happened next in previous occurrences.

Each time marked a short-term top in price, which was followed by a mild pullback — between 2% and 4% — over subsequent days or weeks.

With today’s action, IWM is down -2.96% from Tuesday’s close to today’s (-4.26 from high to low) as the extreme level of extension is being resolved. And it’s still ~2% above the 8-day moving average. So, there could be more short-term downside ahead.

To be clear, a high RSI reading is not a bearish signal. Strongly trending stocks/indexes/ETFs can and should maintain an RSI near or even above the ‘overbought’ reading of 70.

The most bullish thing prices can do is move strongly higher.

This situation does not call for alarm bells in the medium or longer term. In fact, it’s quite the opposite. IWM has finally moved upward from a long consolidation period and could have much higher to go.

In the short-term, this is exactly the kind of action expected.

Now we can look for the 5/8/21-day moving averages to catch up to price and then see if it can propel itself higher once again. Or does it get a deeper pullback to test previous recent highs near $212.

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The Charts

SPY approached the pivot high at $550.12 before managing to close back above the 21-day MA. RSI is still holding the bullish upper half. This would be a great place for a bounce and its possible we’ve seen the beginning of that this afternoon.

Of course, its also possible for it to move deeper and closer to the 50-day MA. We have not yet seen a 10% correction for 2024 — something that happens once a year on average.

So we’re in a middle ground now and should continue to follow the process to manage risk and see which bounces hold — i.e., On the shorter time-frame charts (15-minute, 30-minute, 65-minute), does it make a higher low followed by a higher high? Does it get back above the 5-day MA? And then the 8-day? And so on.

QQQ spent day two beneath the 21-day MA but found some support on the anchored VWAP from May 31 after dipping below. The same playbook applies. Does that bounce hold? Does it make further upward progress from here?

If not, there is a gap area and the 50-day MA near $470 to watch as next potential support.

IWM

see above

DIA was extended in a similar fashion to IWM. Its RSI peaked north of 82 yesterday, and some selling came in to move prices lower. There is a pivot high at $401 and the 8-day MA just above that for potential support.

TLT continues to hold short-term momentum, closing a penny away from its 8-day MA.

DXY US Dollar futures got a reflex rally today after breaking support yesterday. It has many layers of potential resistance overhead that should help keep prices lower, helping stocks.

BTCUSD continues to hold the 50-day MA as the recent rally takes a rest, but holds up well so far. Some time to allow the 8 and 21-day MAs to catch up would be constructive and could push this one higher again in time.

Otherwise, we’d really want to see it stay above the 200-day MA on any down move to keep the longer-term bullish trend in place.

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The Trade

Continue to monitor potential support levels in the names you like. Example:

• NVDA has been near its 50-day MA and the $118.04 pivot level for two days now.

• AAPL has moved lower, nearing its 21-day MA and the $220.20 pivot level.

• SPY is on its 21-day MA and nearly touched the pivot high of $550.12 today.

Levels of interest.

We can see how names behave as they reach those potential support areas.

• Do they hold and bounce?

• Or do they blow right by?

Then watch for indications of returning strength —

• Do buyers step in at the expected levels?

• Does the issue put in a higher high and higher lower on the smaller time frames?

— while looking to add new long positions or adding to existing ones.

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The Disclosures

***This is NOT financial advice. This is NOT a recommendation to buy, sell, or trade any security. The content presented here is intended for educational purposes only.

Andrew Moss is an associated member of T3 Trading Group, LLC (“T3TG”), an SEC-registered broker/dealer and member of FINRA/SIPC. All trades placed by Mr. Moss are done through T3TG.

Statements in this article represent that person’s opinions only and do not necessarily reflect those of T3TG or any other person associated with T3TG.   

Mr. Moss may hold an investment position (or may be contemplating holding an investment position) that is inconsistent with the information provided or the opinion being expressed. This may reflect the financial or other circumstances of the individual, or it may reflect some other consideration. Readers of this article should consider this when evaluating the information provided or the opinions being expressed.

All investments are subject to the risk of loss, which you should consider in making any investment decisions. Readers of this article should consult with their financial advisors, attorneys, accountants, or other qualified investors before making any investment decision.   

POSITION DISCLOSURE

July 18, 2024, 4:00 PM

Long:  IWM0816C230, NVDA

Short:  

Options symbols are denoted as follows:

Ticker, Date, Call/Put, Strike Price

Example: VXX1218C30 = VXX 12/18 Call with a $30 strike