Small Caps Threaten to Break

From the Desk of Alfonso Depablos @Alfcharts

The outlook for equities continues to deteriorate as sellers gain momentum. 

We’ve already discussed how the weakest areas of the market are leading to the downside. Meanwhile, the strongest sectors and industry groups remain stuck below overhead supply, with a growing list of charts completing tactical tops. 

The Russell 2000 falls into the first category, as “the smaller, the weaker” remains the theme for stocks. 

As such, it isn’t a surprise to see the Russell 2000 Index $IWM violate a critical polarity level and follow other laggards lower:

This area represents the prior cycle highs from 2018 and 2020. We think 170 in IWM is as important as any level on any chart right now.

We will watch closely in the coming days and weeks to see how price reacts to this former resistance zone… as well as the pivot lows, which come into play in the low 160s. 

This is a logical level for a short-term bounce, but the question is whether buyers can repair the damage and reclaim this level in a sustainable way. 

On the flip side, if we get downside follow-through in the near-term, we must anticipate another leg lower for this beaten-down group of stocks. 

And if the Russell comes under further pressure, the S&P and Nasdaq will likely follow a similar path lower.

The bottom line is that more and more risk assets falling back below their prior cycle highs is a big feather in the hat for bears. 

As always, we love to hear from you, so shoot us a note and let us know what you think.

Alfonso