By Kathryn James
I spoke of the Russell 2000 back on 22nd March (see post) at the time I was watching for a false breakout above 833 and signs that the trend was slowing. The price continued higher for the very short-term to hit a high of 847.9 only a few trading days later. The momentum in the uptrend has slowed and yesterday as the market celebrated the strong U.S manufacturing data, the Russell failed to get above the high on the right shoulder of 833 and in an insolent statement to the rest of the market unwound the ‘data rip’ completely and closed marginally off its lows. (I have included a 5 minute chart of IWM to highlight this action below; IWM is the widely traded ETF of the Russell 2000.)
The significance of 833 is that it is now the high of a right shoulder on what we can now see as a potential head and shoulders pattern. The head’s high on 27th March allows us to draw a new trend line from the lows in October and this trend line was breached on 4th April with a gap lower at the open on that day. The neckline support stands at 770.
The Russell 2000 serves as a benchmark for small cap US stocks so it’s more speculative in nature and is often seen as a good gauge of market direction. Investors will invariably sell the more vulnerable first over the blue chips in times of turmoil.
At this juncture there are bearish indications in the Russell as the rally grows weary which should not be ignored, it’s vital to watch 770 for neckline support and 848 for resistance, also keep in mind 833 for a higher right shoulder and end to the so-far potentially picture-perfect head and shoulders. The market was showing signs of weakness prior to the manufacturing data announcement and time has been bought for the bulls which may morph into a new leg higher. However, the fast unwinding of the upswing in the Russell is bearish in all its glory.