Stocks quoted in this article:
One of the interesting things I've noticed is a pattern that is potentially developing on the iShares Russell 2000 Index Fund (IWM). This exchange-traded fund (ETF) is essentially a mirror image of the Russell 2000 Index (RUT), but has the added feature of being traded, so we're able to evaluate volume easily. Right now, we're potentially in the midst of forming a head-and-shoulders pattern. This is usually a potential reversal pattern, but a sell signal is not given until there is a break below the neckline after declining from the right shoulder. In fact, some technicians will even wait for a move back to the former neckline after the initial break below this level before entering a short position.
Right now, this is merely an observation of a potential pattern in this small-cap ETF. I wouldn't necessarily short the IWM for a move back down to the neckline, but it is always important to be aware of technical patterns that may be developing. Another thing to watch for is how many people in the financial news and media catch on to this formation. Once these signals become very widely followed and talked about, they can actually create an opportunity to fade these popular patterns.
I have also heard a lot of financial reporters and news anchors comparing the stock market action in 2012 to last year, and wondering if we will have a dramatic sell-off like we did last summer. Obviously, Europe and China are the predetermined culprits for this type of price action. To me, the fact that so many people are worried about this makes the possibility of it actually happening much, much smaller.