The Russell 2000 Index futures came within four points of reaching a target that has been five years in the making. Here's how this target was derived, and why reaching it could spark a rather aggressive selloff.
The ABCD measured move target offers an easy, and oftentimes reliable, method for projecting price targets. It's a very popular approach to forecasting targets because of its simplicity and its scalability across timeframes, which makes it perfect for algos and program traders.
The idea behind the ABCD measured move is that the distance between points A and B will equal the distance between points C and D (AB = CD). In essence, after an impulsive move in a given direction, that move should be equaled in distance after the C point has been found, with the C point being the turning point in the chart (higher low, or lower high).
The weekly chart of the Russell 2000 mini futures shows the initial impulse rally from the 341.60 low established in Q1 of 2009 eventually completed at the B point at 872 in Q2 of 2011, which was a move of 530.40 points.
Once the higher low was formed at the C point at 597.10 in Q4 of 2011, we could then project the AB leg higher from the C point to give us a target of 1127.50 at point D sometime in the future (597.10 + 530.40 = 1127.50).
Now that price has nearly completed the 1127.50 five-year target, it's time to really pay attention. You see, after a significant measured move has played out, institutions, program traders, and algos begin to take profits. When heavy hitters line up at a level for profit-taking, significant reversals can occur.
However, until the 1074.60 pivot is taken out, the trend is still up.
The daily timeframe shows the TF remains within a significant bull trend, and virtually every measured move target has been reached this year alone.
Until proven otherwise, you've got to continue to buy the pullbacks with targets at new highs. The major pivot to watch is 1074.60. As long as price remains above this pivot, look for three measured move targets to be reached above - the five-year 1127.50, the 1129.90 target projected from the September low, and the newly established 1162.40.
Otherwise, a violation of the 1074.60 low could provide more downside pressure toward prior support at 1035, which could spark the first leg of a major correction.
As always, use stops and keep an eye on the 10-handle rule. Don't forget to catch MrTopStep on The Closing Print video found under the OptionsTV page (top bar). We report directly from the SPX pits, wrapping up the day and positioning for trade tomorrow.
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