Russell 2000 / Small Cap Preparing For a Nasty Dip?
Here we have the weekly chart of the Russell 2000 index futures market (similar to the IWM if you're trading ETFs). The small cap index is often thought to be a leading indicator of US market sentiment. Whether this is due to its wide breadth across industries (2000 companies vs 500 in the SPY and just 30 in the DOW) or because most of the companies in the index are domestic, the Russell gives a more "pure" picture of the US market at a glance. What we see currently on the weekly chart is the convergence of multiple price channels and a potential harmonic pattern that could spell trouble in the medium term.
First, the good news. The long-term rising channel (white lines from 2016 lows and 2015 highs) is a sustainable uptrend. We can see in 2018 that when price breaks above or below this channel, what follows is a volatile swing back to the center of the trend channel. There's a relatively good chance that price remains within or near this channel for the foreseeable future. The dotted line is the center of the channel, and we had 2 consecutive closes above it on the weekly chart leading up to this week. We have back-tested that center line this week, and a 3rd close above it tomorrow (around 1585) would be evidence that bulls are willing to push higher here.
Now for the less good news. While the other (tech-heavy) indexes have been making new all-time highs more than 20 times this year, the Russell 2000 small cap index has been stuck in a parallel channel (orange) for nearly the entire year after the magnificent V-shaped bounce following the test of the lower bounds of the uptrend. The orange channel between ~1450-1600 has seen traps on both sides, yet even with all this exuberance (euphoria?), we can't seem to close above it.
There's also potentially a developing uptrend channel demonstrated by the pitchfork (green/blue/red on the chart). While we didn't get the confirmation test on the lower 3rd of the channel when we closed below the orange parallel channel in August, we have seen the upper-3rd act as resistance on multiple occasions. A quick blow-off top above the orange parallel channel that gets stuck on the rising green line between 1660-1720 or so could be enough to bring on that missed-test below. I'd expect that first test to hold, but you never know.
Finally, a bullish harmonic pattern may be forming on the weekly chart. While this sounds positive (and it is, over the long-term), these patterns tend to bring on rather extreme drops just prior to their namesake bullish bounces. If we see the Russell 2000 reverse around the 1700 price point, for instance, we could be building a bullish Gartley pattern, which would put the next bounce as low as 1117 based on the Fibonacci measurements (a 78.6% retracement of the 2016 to 2018 bull run).
Certainly, if we get a pullback of that magnitude (~30% drop from today's price), I'm a buyer. Until then, I'm looking for either a short-term long targeting the 1700 price area if we close above the orange channel, or more likely, wait for the bearish trade to develop with either a rejection tomorrow or next week around 1600 with a first target of 1455.
First, the good news. The long-term rising channel (white lines from 2016 lows and 2015 highs) is a sustainable uptrend. We can see in 2018 that when price breaks above or below this channel, what follows is a volatile swing back to the center of the trend channel. There's a relatively good chance that price remains within or near this channel for the foreseeable future. The dotted line is the center of the channel, and we had 2 consecutive closes above it on the weekly chart leading up to this week. We have back-tested that center line this week, and a 3rd close above it tomorrow (around 1585) would be evidence that bulls are willing to push higher here.
Now for the less good news. While the other (tech-heavy) indexes have been making new all-time highs more than 20 times this year, the Russell 2000 small cap index has been stuck in a parallel channel (orange) for nearly the entire year after the magnificent V-shaped bounce following the test of the lower bounds of the uptrend. The orange channel between ~1450-1600 has seen traps on both sides, yet even with all this exuberance (euphoria?), we can't seem to close above it.
There's also potentially a developing uptrend channel demonstrated by the pitchfork (green/blue/red on the chart). While we didn't get the confirmation test on the lower 3rd of the channel when we closed below the orange parallel channel in August, we have seen the upper-3rd act as resistance on multiple occasions. A quick blow-off top above the orange parallel channel that gets stuck on the rising green line between 1660-1720 or so could be enough to bring on that missed-test below. I'd expect that first test to hold, but you never know.
Finally, a bullish harmonic pattern may be forming on the weekly chart. While this sounds positive (and it is, over the long-term), these patterns tend to bring on rather extreme drops just prior to their namesake bullish bounces. If we see the Russell 2000 reverse around the 1700 price point, for instance, we could be building a bullish Gartley pattern, which would put the next bounce as low as 1117 based on the Fibonacci measurements (a 78.6% retracement of the 2016 to 2018 bull run).
Certainly, if we get a pullback of that magnitude (~30% drop from today's price), I'm a buyer. Until then, I'm looking for either a short-term long targeting the 1700 price area if we close above the orange channel, or more likely, wait for the bearish trade to develop with either a rejection tomorrow or next week around 1600 with a first target of 1455.
Comment:
As far as timing goes, the IWM monthly chart began printing a 200 sma in 2017. It will likely cross the bullish Gartley reversal zone sometime in 2021. I'd guess that's when we hit our bottom if this plays out. As far as the top....could be a matter of weeks to months, but I don't anticipate it takes a year to develop the B=C wave.
Comment:
10 points to the green trendline resistance form original chart. I expect IWM to fizzle out somewhere within the next 30 points. Watch the Monthly 50 sma. A close below and we may see a significant dump.
Comment:
...and we tapped the trendline and retreated....next week will be critical
Trade active:
Bearish rejection. This is a SELL/SHORT
Comment:
Measured support REACHED! If Russell turns around here, we COULD see up to a 61.8 retrace. Next week (3/23) is CRITICAL for bulls to slow the downward momentum. Any bearish trades from here need to have tighter stops - expect a retracement soon....after that, all bets are off.