Close Together Doesn't Mean Best Friends

In just a few trading sessions the small caps in the Russell 2000 Index went from multi-year highs as the hottest rotation plays in the market down to multi-month lows.

The IWM, ETF for the Russell (below, on the updated daily chart), shows the small caps violently testing the 200-day moving average (yellow line) on Monday before bouncing up to the relatively close-together 50-day moving average (dark blue line) today and finding some initial resistance. 

What stands out most about today's opening rally is that it came on the back of comments from the Bank of Japan overnight that they would be reluctant to raise rates beyond what they did last week if they deemed markets to be unstable. Markets inferred from that statement that the BoJ had "blinked," and catapulted higher. 

But the BoJ did not cut, at least not yet. And just like a stereotypical bear market rally, this one smacks of exceedingly high hope, exuberance that the worst is over, is fast and furious...but is likely doomed to fail and roll back over. 

As the Nasdaq has closed its gap from last Friday I expect resistance to be taken much more seriously now. And the IWM looks like a sloppy bear flag with 50-day moving average resistance in play. 

Overall, despite volatility collapsing since Monday's open, or perhaps because of it, bulls look like they are fighting the last war--This time around the major central banks are trapped through no fault of their own, simultaneously battling sticky inflationary forces against signs of economic growth slowing.