About That Head and Shoulders Pattern in the Russell 2000

So is it a head and shoulders pattern?

Yup.

The Russell 2000 Index of small-cap stocks was up 40% in just 6 months. By looking at this chart, the potential head and shoulders top formation is pretty obvious. The neckline is clear, left shoulder in February, head in March, and a right shoulder put in earlier this month. It's obvious right? Josh and Phil were discussing it on the train back from Boston Wednesday and asked me about it.

Look at the 6-month chart of the iShares Russell 2000 ETF ($IWM):

The small-cap index went up 150% in 3 years, 40% since October. So the trend here is up, no doubt about that. And since markets trend more often than not, finding turning points can be difficult. But we can't ignore this classic topping formation. $78/share is my line in the sand. As usual, the market isn't perfect and sometimes likes to tease by breaking down a couple of pennies below key trendlines before reversing. This was the case in $IWM the last couple of days getting down to 77.97 on Tuesday and Wednesday before reversing higher.

If this week's lows get taken out then the price target for $IWM is about $72 ($78 minus 6 point range). But for now, I think we still have to give the bulls the benefit of the doubt. We were up almost the full 40% in just 4 months, then pretty much consolidated for 3 months in a sideways range. What's wrong with that?

Also look at momentum: RSI is still in bullish mode. We haven't seen any oversold conditions showing eveidence of mass selling. Quite the opposite in fact: the Russell has spend the last 3 months working off those overbought conditions from February without getting oversold (which would have been a bearish characteristic).

So is it a Head & Shoulders Pattern?

Yea. Sure. So what?

Is it a Head & Shoulders TOP?

Don't know yet. Doesn't look like it. But we'll know soon if it is.

Tags: $TF_F $RUTX $RUT $TWM $UWM