Cramer: Don’t Get Distracted by Dow Gains
If you're an individual investor chances are you're very focused on the Dow.
The price action on Wednesday was extremely bullish with the index closing at 13,412 – that's up a whopping 308!
Across Wall Street History, there have only been five instances when the Dow made a triple-digit move on the first day of trading. And the by year's end, the Dow had gone onto finish with a gain of greater than 7 percent in each of those years.
No doubt about it - that kind of superlative is certainly attention getting.
However, if you're only focused on gains in the Dow right now, then you're at risk of missing another move – one that could be even bigger.
According to Bob Lang, a technician who is also a Cramer colleague at RealMoney.com, patterns in the charts of the Nasdaq 100 and the Russell 2000 suggest both indexes are positioned to outperform again in 2013, just like they did last year in 2012.
Here's the 4-1-1.
Looking at the daily chart of the QQQ's (an ETF that tracks the NASDAQ 100), the price action is technically bullish. The QQQ managed to close out last year above its 200 day moving average—a very positive sign for chartists.
According to Lang, 70 is the next key level – that's about 3.50 above where it was trading at the time of writing. If the QQQ's can break out above 70, then Lang says there's little resistance up to 95.
Looking at the weekly chart of the QQQ's, Lang thinks there's a similarly bullish setup.
Over the last several months, the QQQ's have been consolidating after a big move higher at the beginning of 2012. According to technical analysis, the base may be like a launching pad for the next big rally.
Also, Lang says the Moving Average Convergence/Divergence line or MACD is signaling a big breakout.
Largely Lang believes this is an historical pattern that's about to repeat itself. It's been at these levels before, when the QQQ took off in September of 2010, and again in December of 2011.
Looking down the road a little further, Lang ultimately expects the QQQ to make a new all-time high—that's over 115—by late 2014 or early 2015.
At the time of writing the Russell 2000 was literally pennies away from its all-time high, which it made this past September. Patterns in this chart lead Lang to think the index could soon be making another new all time high.
He points to something called a 'cup and handle' formation. That's where you have a deep bottoming pattern that sort of looks like a cup, and then after the rebound you get a brief pullback that kind of looks like the cup's handle.
Although the cup and handle formation is subject to interpretation, it can be one of the most reliably bullish patterns out there.
Normally, when a security breaks out from the handle, you get a big move higher. And Lang says that's exactly what the Russell 2000 is doing right now, it's busting out of the downward handle formation – something that happens before it shoots higher.
In addition, Lang identified another bullish catalyst – volume.
The Russell 2000 has had strong volume on the up days since mid November, and much lower volume on the down days. Typically strong volume on up days is a sign that big institutions are buying.
Also, Lang notes there are seasonal patterns in the Russell that could be bullish. Read More: Why Are Optimistic Investors Called Bulls?
Lang says that small caps usually tend to come on very strong at the beginning of the year. And you can see that in six of the last seven years, you caught a terrific rally in the Russell 2000 if you owned it in the first three months of the year.
(The only exception was 2008, but then again, 2008 was a pretty exceptional year all around.)
If Lang is right, then the Russell 2000 could be the best big index around, at least for the next three months.
What's the bottom line?
According to chart patterns as interpreted by Bob Lang, 2013 could be a very good year, with the Nasdaq 100 and the Russell 2000 posied to make big moves.
"You know I'm not a chart guy, but I wouldn't be at all surprised if he's right," said Cramer.
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