Technical Analysis: Still long-term bullish

Small cap stocks gapped higher on the opening Monday, which triggered an impressive climb to NEW RECORD HIGHS for the Russell 2000. Chart action on daily studies was a day trader’s dream last week, with reliable signals paving the way to huge, quick swings.

The gap last Monday morning highlighted one of my favorite chart-watching moves - when a market has an opening gap that is not quickly filled, you should always favor the direction of the gap. I’m not just saying that from a historical number crunching perspective, either; there are reliable fits of human emotion that play into how the market trades opening gaps, especially after a weekend break.

Imagine the fear from those who have been shorting small cap stocks and small cap stock index products when the market gapped higher Monday and eventually soared to new all-time highs. If you were short and sitting on a minimal equity stash, you likely needed to panic and pay your way out of those losing positions, which helped fuel the ride higher off the opening gap.

Then, in textbook fashion, we saw a great double top on daily charts on the high (remember, the previous February highs were complemented by a powerful double top on weekly charts). The double top pattern shows that the market tested new buying interest at these fresh record high price levels and came up exhausted, which then sparked a tumultuous 3-day slide to last week’s lows.

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