Over the last few weeks I’ve been getting an unusual amount of emails about a head and shoulders pattern in the small-cap Russell2000 Index. I think today is as good a time as ever to address this possibility.
First of all, the Russell2000 has to be considered to be in an uptrend until it starts to make lower lows. We don’t have that yet. But here is the daily chart showing what some chart readers might call a potential head and shoulders topping pattern. I want to reiterate that this is just a potential pattern since confirmation does not come until the neckline is broken.
We can see the shape of this formation taking place with the left shoulder in January, Head in March and the “right shoulder” is being put in as we speak. All of this is only worth discussing at a cocktail party, and there’s no reason to act on it until the neckline around 1080 is broken.
Now if this is a major topping pattern, does it come at a logical area? Or is this just random resistance. I would argue that this actually is an area where we should expect at least some supply to show up. In fact, this area represents the 161.8% Fibonacci Extension from the entire 2007-2009 crash when the Russell2000 lost 60% of its value:
So is this is it? Is this the top? I have no idea. Until the pattern is completed, there’s really nothing to talk about. From a more tactical perspective, and less structural, I think a break below 1117 would be a big warning that a bigger break could be coming. So that’s what I’m watching right here.
On a relative basis, we’ve been hearing a lot about the underperformance of the Russell2000 compared to the large-cap S&P500. This chart shows the ratio of the two ETFs (IWM/SPY) bouncing off key support. This level represents the uptrend line from 2009. A break here below last month’s lows would be another warning of bigger problems to come.
So I think these charts above all tell an interesting story. But there is little to act upon, as far as what I see. I’d prefer to be position elsewhere, at least for now.
Tags: $IWM $RUT $SPY $SPX $ES_F $TF_F