Breakout or Fakeout as Small Caps Hit 6-Month High

U.S. small cap equities motored higher following the release of the July inflation report, with the Russell 2000 closing at its highest level since February. While I have serious reservations about the scale of rate cuts markets have priced in from the Federal Reserve over the next year given persistent strength in services inflation, the readthrough suggests economic activity is nowhere near as weak as the July jobs report would have you believe. That’s a bullish sign for small cap earnings, even though it may eventually lead to markets paring rate cut pricing in the period ahead. I suspect traders would take fewer rate cuts if it meant a stronger economy.

The latest surge saw the Russell close above 2278 resistance, providing a level for traders to work with depending on whether the breakout sticks. With RSI 14 trending higher and MACD having just crossed the signal line from below in positive territory, the momentum signals are entirely bullish, favouring a similar directional bias.

If the price can hold 2278, longs could be established above the level with a stop beneath for protection. Targets include 2320, 2375 and 2468, depending on desired risk-reward.

Alternatively, if the break fails, the setup could be flipped with shorts established beneath 2278 with a stop above for protection. 2242, the 50-day moving average, 2192, and the 200-day moving average are all options for targets. Given price and momentum signals, this setup looks a lower probability play relative to being long small caps.

Good luck!
DS