The Russell2000 is a market that has frustrated the majority of its market participants over most of the past year. Sideways trading ranges tend to do that. It’s not fun. Lack of trends whip around traders until they just throw in the towel and give up. This is a big reason why I think big bases tend to have explosive resolutions. The frustrated participants that give up, now have jump in late to try and play catch-up. It’s the fear of “missing out” that drives price higher. There is an old saying that goes, “The bigger the base, the higher in space”. I believe we have exactly that in the Russell2000 Small-Cap Index.
The first chart shows the weekly candlesticks in a sideways range over the past 16 months. We have now tested the upper end of this range four times since it first peaked in March of last year. The more times that a level is tested, the higher the likelihood that it breaks. I believe an upside breakout is coming any minute and we want to be buyers of that breakout. The catalyst, to me, is the failed breakdown in October below support from last February and May near 1080:
The upside target based on this consolidation is above 1320 which represents the 161.8% Fibonacci extension of the entire correction from last year. This represents around 10% from current levels. Risk management-wise I don’t see any reason to be long if we are below all of this overhead supply from the past year. But above it and we want to be all over it. The best part is how well-defined the risk becomes upon an upside resolution.
Here is a short-term look at this consolidation. This is a daily candlestick chart showing this sideways range since late 2013. The overhead supply is very clear. Each time that price has approached this level, the sellers have taken control. Every time prices get there, by definition fewer and fewer sellers are there to sell, because many of them have already sold. Eventually when the sellers dry up and demand takes control, that’s when prices are driven higher. I believe this happens soon:
Look at that failed breakdown in October. I think that will be the catalyst to drive this higher. The upside target is above 1320 and based on how long prices have consolidated in a sideways range, I believe we hit that target quickly.
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