Russell 2000 Up 9 Days in a Row - Does This Bode Well?

by: Moby Waller

As of Thursday's close, the small-cap oriented Russell 2000 Index (RUT) (NYSEARCA:IWM) had closed higher for 9 straight trading days. We decided to look at previous examples of this occurrence and see what the market did in the short-term following such a consistent upmove.

Going back to all the available data from 1987 to the present, there have not been a huge amount of occurrences ... this is a fairly rare event. There have been 33 "hits" on the long side in this time frame, if you look 5 trading days later (basically a week). With a buy on the open on the morning following the 9th up day and sell the close after holding for 5 trading days, the RUT was higher 58% of the time (19 up, 14 down) -- a bit better than a 50/50.

However, if you stretch the holding period out to 10 trading days (2 weeks), the data is much more bullish. In this case the market was higher 71% of the time (22 of 31 occurrences). Certainly this is a fairly small sample size of trades ... but anything above 2/3 is a pretty strong trend, in my experience. The "optimal" holding period of up to one month after the signal is actually 12 trading days, based on max profit optimization.

Now, breaking down the data, one interesting thing is that we have just had 2 occurrences of this event in 2010, almost back-to-back. Feb 9 to Feb 19 2010 was one signal, and we just had another today, March 12th. This is the first time this 9 day up sequence has occurred in the Russell since 2003, and it happened basically twice in a row already this year!

Here are the actual numbers:


Summary and Bottom Line Projections:


So, what does data give us in terms of projections? Well, there looks to be over a 70% chance that the Russell 2000 will close higher 10 trading days from now. The average gain, including both wins and losses, is 1.54%, which gives a potential gain of 10.45 points to a target of 689.17 on the RUT. If we look at the average up move of 2.92%, that gives a target of 698.54 and a gain of 19.82 points. The average loss of -1.85% gives a potential downside target of 666.16, 12.56 points.

Russell 2000 Daily Chart

Disclosure: No current positions.