For much of 2014 the Russell 2000 (RUT), which represents small caps stocks, has underperformed. This highlighted a move to safer risk assets, such as large cap stocks. But this underperformance may have reached an extreme when the market bottomed in mid-October.
Since bottoming on October 15th, the small caps index has been on fire: it’s been up 6 out of the past 8 days, rallying 7.5% off its intraday lows.
So what’s next? Well, the index that signals risk on/risk off (beta in the markets) is nearing a confluence of technical resistance that may pause the rally or potentially put in a short-term top that could lead to much lower prices.
Let’s outline the resistance levels:
- The falling 50 day moving average is at 1129.
- The broken uptrend line (backtest) is around 1138/40.
- The falling 200 day moving average is at 1146.
- The downtrend line from the July highs is also near the 200 day moving average.
For a better look at the small caps index, check out the Russell 2000 chart below.
Russell 2000 Daily Chart
On a positive note, the Russell 2000 has put in a “V” bottom and the Relative Strength Index (RSI) has moved back above 50. The small caps index is currently at 1118.82, 1 percent below the first resistance at the 50 day ma and 2 percent (or more) below the next two resistance levels mentioned above.
This should give the Russell 2000 a chance to rally a bit more this week. As well, the Russell 2000 is on daily bar 9 (Monday) of a 9 sell setup which should produce a reaction lower by mid week.
What will be interesting is to see how the index responds to the next pullback. That will tell the tale, so stay focused. Traders can also track the index through the iShares Russell 2000 ETF (IWM).
Trade safe.
Follow Andrew on Twitter: Â @andrewnyquist
No position in any of the mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
