Russell Points to Higher Prices: Opinion

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( Options Trading Signals) -- Members of my service are used to seeing analysis about the Russell 2000 Index on a daily basis.

Every day I monitor the price action in the iShares Russell 2000 Index ( IWM), the iShares Dow Transport Index ( IYT) and the Financial Select Sector SPDR ( XLF).

Quite often one, if not all, of these ETFs start throwing off clues about Mr. Market's favored direction.

During strong moves in the market, all three ETFs generally will move in the same direction regardless of whether prices are going up or down. If the move is strong and has momentum, all three will move the same way, but one generally will display relative strength against the others, and against the S&P 500.

Recently the Russell 2000 Index started showing signs of life, and then the transports and financials followed the small-caps higher. Although both the iShares Dow Transport Index (IYT) and the Financial Select Sector SPDR (XLF) traded higher in recent days, neither had the relative strength that the Russell 2000 ETF (IWM) had.

When the small-caps speak, I listen, and they have been screaming that higher prices may be likely next week and into the first week of June. However, as the daily chart of IWM below illustrates, they had some major work to do the rest of Friday and next week.

If the price action in IWM can push above the upper bound of the recent downtrend and show continuation higher, the S&P 500 likely will push up to the key 1340 price level for a retest. If the S&P 500 is able to penetrate the resistance area, the 1400 to 1450 price level likely will come into play. The daily chart of the S&P 500 Index is shown below.

I am leaning bullish on the S&P 500 and risk assets in general (commodities) going into the final week of May and the early part of June. I am expecting a news event to move the markets in a big way within the first few weeks of June.

My guess is that an announcement coming out of Europe will be the headline that pushes the market into overdrive. For now, the price action is coiled, and we are about to witness a big move.

Although I am leaning bullish, I am certainly not willing to risk capital in an attempt to game price action. I will sit back and wait for price action to confirm and pick my spots.

Anticipatory trades do not fit my risk tolerance or trading style and I consider them sophisticated gambling. I'm going to let others do the heavy lifting and wait for confirmation about the trend's direction.

At this point, the small-caps are signaling that higher prices are likely for equities, but the real question is whether Mr. Market is just toying with us and this is nothing more than a head fake. Risk is excruciatingly high.

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