The broader inventory market indexes are nonetheless in a holding sample as traders await the Fed’s resolution on Wednesday. Tuesday’s worth motion was a bit like a “Whac-a-Mole” sport for the S&P 500 ($SPX) and Nasdaq Composite ($COMPQ). Each indexes poked above their downward-sloping trendlines (the Nasdaq’s line is steeper) however fell again beneath them by Tuesday’s shut. The Dow Jones Industrial Common ($INDU), which hit an all-time excessive on Monday, additionally retreated, snapping its four-day up streak.

Small- and mid-cap shares have been Tuesday’s leaders, with the S&P 400 Mid-Cap Index ($MID) up by 0.34% and the S&P 600 Small-Cap Index ($SML) up 0.60%. 

Turning to the Prolonged Elements Market Elements information panel on the StockCharts Dashboard, small-cap income (RWJ) and small-cap high quality (XSHQ) ETFs have been the most important gainers. The Invesco S&P SmallCap 600 Income ETF (RWJ) took the lead on the finish of final week—we talked about this in our weekly ChartWatchers publication—and continues gaining energy and momentum.

A Weekly Perspective

It is price breaking down the worth motion in RWJ earlier than Wednesday’s FOMC assembly, beginning with the weekly chart.

FIGURE 1. WEEKLY CHART OF INVESCO S&P SMALLCAP 600 REVENUE ETF. RWJ has been buying and selling inside a variety since early 2021. It is on the brink of escape of the vary, however whether or not it does will rely on how the Fed’s resolution appeals to traders.Chart supply: StockCharts.com. For academic functions.

RWJ has been in a buying and selling vary since early 2021 (blue rectangle). Throughout that point, traders gravitated towards mega-cap Tech shares whereas different asset lessons, comparable to small-cap shares, have been left behind. However that might change relying on what the Federal Reserve decides on Wednesday. Rate of interest cuts would profit small-cap shares. That RWJ is buying and selling above its buying and selling vary signifies that traders are hopeful the Fed will resolve on a half-point fee lower.

The StockCharts Technical Rank (SCTR) within the prime panel is at 89, which signifies that RWJ is technically robust. A fee lower may enhance this rating if traders proceed accumulating this ETF. The relative energy index (RSI) is stalling between 50 and 70. A break above 70 could be optimistic for RWJ, whereas a fall beneath 50 would present that curiosity within the ETF is weakening.

However what if the Fed decides on a quarter-point lower as a substitute of the half-point the market expects? Will traders get upset and dump their small-cap shares? Bear in mind, the inventory market can change rapidly for no sound motive. For this reason it is best to map out bearish and bullish situations forward of a risky buying and selling day.

Let’s study RWJ’s each day chart to know the 2 situations higher.

FIGURE 2. DAILY CHART OF RWJ. The ETF should shut above its final excessive of $45.39, and the MACD ought to mirror stronger shopping for stress.Chart supply: StockCharts.com. For academic functions.

A sequence of upper highs will affirm an uptrend. If RWJ closes above its final excessive of $45.39, it may break the marginally bearish development the ETF has been in for the final month and a half.

The shifting common convergence/divergence (MACD) indicator, which can also be trending decrease, reveals early indicators of accelerating bullish stress. The MACD line has simply crossed over the sign line, and the MACD histogram is barely above the zero line. Nevertheless it should be rather more distinguished to verify a bullish transfer in RWJ.

If bullish momentum kicks in on Wednesday after the Fed makes its rate of interest resolution, a great entry level could be at $45.50, round its July 31 shut. If the Fed’s resolution disappoints and would not favor small-cap shares, then give attention to which asset lessons outperform from the Market Elements panel within the StockCharts Dashboard.

Closing Bell

If it is time for small-cap shares to shine, you may enter the bull run early. However keep in mind, this can be a new all-time excessive for RWJ, so in the event you enter a place, regulate momentum. So long as momentum retains the ETF rising, you possibly can trip out your place, however if in case you have made a decent revenue and detect a slowdown, be ready to exit your positions. There isn’t any motive to be married to an funding.

Disclaimer: This weblog is for academic functions solely and shouldn’t be construed as monetary recommendation. The concepts and techniques ought to by no means be used with out first assessing your individual private and monetary scenario, or with out consulting a monetary skilled.