The Russell 2000 Small-Cap Index (RUT) has been all over the map in the last two sessions, moving in a 4% range and forming two bearish topping candles. These particular candles are reverse images of each other, and this confusing price action could send traders heading for the exits.
In the first two hours of trading on Friday the Russell dropped sharply, only to find its legs and reverse direction, closing about where it had opened. This formed a large “hanging man” candle, just above the 50 day moving average. Schizophrenic
A hanging man candle has a long lower shadow or tail, and a narrow opening and closing range situated near the high of the day. It is interpreted as a sign that buyers are losing control and while they managed a late-day rally, the ability to sustain upside momentum is in question.
On Monday, the index gapped open but any of Friday’s residual upside momentum was spent in the first ten minutes of trading. The Russell spent the remainder of the session moving lower. It ultimately closed the gap and finished near the low of day.
Monday’s action formed a large “gravestone” doji or a candle with a long upper shadow or wick, and a narrow opening and closing range situated near the low of the day. A gravestone doji often forms at market tops.
The schizophrenic behavior of the Russell small-cap index over the last two days suggests that traders are unsure of the sustainability of the most recent leg up in the small-cap stocks. If they begin to take profits momentum will shift and could easily accelerate to the downside.
(Additional info from ZeroHedge.)