Is this rally real?
As you can see from our Big Chart – we're just above the 200-day moving averages, which was our goal for this rally – on all but the Russell 2000, which is at 1,574 in the /RTY Futures and we need them to confirm by getting over the line at 1,587 but we'll want to see 1,600 before we feel comfortable and we are expecting the Russelll to lead us – up or down, for the rest of the week as more and more small caps report their earnings.
We had an in-depth look at /RTY in yesterday's Live Member Chat Room where we concluded:
So, that being the case, we would expect the 5% Rule to be obeyed between 1,440 and 1,800 which is 360 points so 72-point bounce lines to 1,512 (weak), 1,584 (strong), 1,656, 1,728 (weak retrace – where we failed before) and 1,800. So expect good resistance at 1,584 and no more than a strong retrace of that run from 1,440 (if we're bullish) which is 144 so 29(ish) down to 1,555 (weak retrace) and 1,526 and we'll see how that goes:
In other words, our 5% Rule™ predicted a run to 1,584 and now the 200 dma is 1,587 so we're pretty confident taking a short up here with very tight stops over the line that risk a loss of $5 per point, per contract so let's say we call 1,580 the shorting line and 1,590 the stop (though I would add another short at 1,586 to average 1,583) so the risk would be losing 8 points over 1,590 ($40 per contract) and our pullback goal is 1,555, which is 25 points (from our initial entry) for a $125 per contract gain and possibly 1,526, for a total of $270 per contract at that level.
The reward potential, in this case, outweigh the risk so we make the play. Sometimes we are right and sometimes we are wrong but, since we can make 3-6 times more when we're right than we lose when we are wrong – we don't have to…