With the S&P500 and Dow Jones Industrial Average getting all the glory based on recent all-time highs, it’s the Small-cap Russell2000 that’s been struggling to reach that milestone. We’ve now been stuck in this range since the 4th quarter of last year. We’re not making lower lows, but we’re also not hitting higher highs. A frustrating sideways range is really the only way to describe the small-caps.
The first chart shows the weekly candlesticks for the Russell 2000 Index. Notice the overhead supply near 1210 and downside support near 1080. This 140 point range representing the consolidation can either be a correction before the next leg higher, or a more complicated topping formation. It’s hard to tell at this point, so waiting for a confirmation is likely our best bet:
The blue line represents the uptrend line from the 2009 lows. A break of that line simultaneously with a break of the lower end of this range could be disastrous for this market. The bearish momentum divergence down below increases that possibility. This downside confirmation would then give us an initial target of 940 based on the 140 point range since late last year. But until that level is broken, there is no action to take here from a more structural perspective.
Looking shorter-term, we can get a better look at this range. Here we’re looking at a daily bar chart with prices towards the upper end of the sideways channel. The lightly shaded area right in the middle of the range represents some important gaps and former support/resistance within this sideways action. I would get much more bearish if we break down below that level, which would also represent a break of the 50 and 200 day simple moving averages. This would likely lead to a 3rd test of this key support.
Overhead supply has been tested twice. A third test of that would increase the likelihood that the resolution out of this range will be to the upside. Another test of this downside support, however, would make that the 4th test of that level and would most certainly lead to an eventual break. So I believe holding on to the 1150 level, or so, is really important to this market.
This has definitely been a frustrating place to be for both the bulls and the bears this year. Sideways markets tend to be some of the most difficult to trade. But I think putting everything in perspective helps us formulate a game plan that we can execute as the market provides more information. For now it’s still a no-touch, but I promise you that the longer these consolidation take to resolve, the bigger the eventual move once a direction has been determined. So I think it’s worth pointing out now and then following closely. I believe a monster opportunity is coming soon.
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