RUT Monthly: The Warning Signs Were There

Pulling out to a Monthly Chart on the RUT, lets see if there was anything we can learn from the evidence the charts had been giving for the last 12 months.

First, lets agree that we all know and love the 20MA on any time frame because this is our bread and butter moving average to define our current trend. If price is trading above the 20MA we're happy to trade long. Better yet, we love to see pull backs to the 20MA as it gives is low risk entries to the upside.

Note that on the monthly the price stayed above the 20MA from May 03 to Oct 07 (that's 53 months).

When the price closes below the 20MA for 2 consecutive periods it is "significant" and should send WARNINGS up all over the place, especially after 53 straight periods staying above the 20MA.

The next significant sign we saw was the 8MA crossing over the 20MA to the downside. This signaled that the end to the 53 month uptrend.

The 20MA then flattened out and became a "ceiling magnet" for the price to test and retest in August and September. When the price was rejected in September the price had no where to go but down.

The 200MA is generally a magnet, and even on this monthly chart we can see that it worked as a magnet yet again pulling the RUT all the way down to within 2 points of the 200MA (RUT low 467.92, 200MA 465.90)

If you were to put the 8, 20 and 200 MAs on an intraday chart and back-test it, you'll see what I mean about the 200MA being a magnet. A flat 200MA will also act as strong support and resistance. So far this month it has been strong support.

In summary, it is important for us to always use multiple time frame charts so we understand the bigger picture. It is also important have criteria for determining our trend bias. In this case we've used the moving averages to help us define our trend.

In using the moving averages, we agree that we are bullish if the 20MA is uptrending and the price action is staying above the 20MA. Additionally we use pullbacks to the 20MA as low risk entries to trade with the 20MA trend.

If there is a 8/20 crossover we agree that the past trend has been negated.

We always want to know where our 200MA is as we understand that it can act as a magnet if the price is heading toward it.

So what did I learn from all of this?

Once the 20MA breaks and a 8/20 crossover occurs, I want to locate the 200MA and understand that, as unlikely as it may be, it is the target.

RUT Monthly Chart: