Russell 2000 Study Suggests Major Market Correction Is Near
Technical analysis shows that the index may be a small handful of weeks away from beginning a major corrective phase that will play out over the next three to seven months.
To examine the implications of this seemingly rarefied scenario, I set up a simple study reviewing occurrences in the 2000s in which the Russell 2000 attained 40+ weeks closing above its 50SMA, lowering the bar modestly to sweep in a larger sample. With the caveat kept in mind that as an already outlying scenario the rate of occurrence of these market readings is low, the results are shared below.
The study sought to answer two questions:
1. What were the vertical (performance) and horizontal (time) results for the Russell 2000 after registering 40 weekly closes above the 50SMA historically?
2. What projections – if any – are available based on those results?
Over the past 10 years, RUT clocked 40+ weekly closes above its 50SMA (the "signal") on five occasions: January 2004; May 2007; April 2010, May 2011; and August 2013, which is currently underway. An astute eye will already catch that each of these dates preceded a legitimate market correction (i.e. -10%+ from price peak-to-trough).
Once this threshold is crossed, the following has occurred historically:
- The index crosses below its 50SMA 13 weeks later, on average
- The maximum adverse incursion (MAI) – i.e., the amount the index moved up – after the signal is given: 3.8% average
- The distance from the signal week's close to first close <50SMA average -11.93%
- Periods since the signal: eight (ongoing)
- Maximum adverse incursion to-date: -5%
- Distance from the signal week's close to first close <50SMA: -11.46%
Russell 2000 (RUT) – Weekly: "40+ Consecutive Weeks >50SMA" Study
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What can we extrapolate about what comes next?
- Given the 13-week average from signal to <50SMA, RUT is projected to tag its 50SMA in approximately five weeks
- The current signal-to-<50SMA of -8 from 1038 projects this will occur near 955: -11.6% from 10/15/13′s close at 1080
Now some additional datapoints:
- The average price decline from the signal to the subsequent price low below the 50SMA: -28.58%
- The median price decline (buffering 2008′s outlier) form signal to subsequent price low below the 50SMA: -21.65%
- From yesterday's close, the projected distance to the ultimate price low based on the average signal-to-low: -32.4%, or 730
- From yesterday's close, the projected distance to the ultimate price low based on the median signal-to-low: -25.37%, or 806
- Average time from signal to the ultimate price low in weeks: 37.5. This includes a 92-week outlier between May 2007-March 2009.
- Median time from signal to the ultimate price low in weeks: 21.5.
- The median time projection from now to the ultimate price low: mid-January 2014
- The average time projection from now to the ultimate price low: early June 2014
Pulling this all together, Russell 2000's active signal at 48 consecutive weeks above its 50SMA projects a 25.37-32.4% market correction (a true bear market, where the bottom would occur in that band), culminating in a low between 730-806 between mid-January and early June 2014.
Those are wide and unwieldy ranges, true; but this far out in price and time the objective should not be to dial in exact vertical and horizontal targets – the number of variables that may intervene would make concrete values all but arbitrary. At this distance, the general implications yielded by the study are more than adequate: Russell 2000 is a small handful of weeks away from beginning a major corrective phase that will play out over the next three to seven months.
Of particular interest in the context of Russell 2000's current position at channel resistance is the proximity of the 200-Week SMA (currently 798) and cyclical rising channel support to the latter target at 806. This scenario vividly recalls 2011′s August-October drop, which just eclipsed a -20% peak-to-trough move, installing a major correction, yet maintaining the cyclical bull market's primary uptrend.
Bonus: Because the S&P 500 (INDEXSP:.INX) is more widely followed and referenced, here's the raw chart for the same study, going back to 2000.
S&P 500 – Weekly: Marking 40+ Consecutive Weeks >50SMA
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This article by Andrew Kassen was originally published on See It Market.
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