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Advanced Technical Analysis - RTY

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Note: the following analysis is formulated as an assimilation of Fibonacci, DeMark, Elliott Wave and other technical indicators. It is offered as education and not intended as advice in any way.

We're updating ou earlier note on the Russell 2000 (RTY) as it has put in a few impulsive waves down from the peaks registered on December 31st and in so doing has reversed from both daily and weekly DeMark trend exhaustion indicators, major daily and weekly divergences, and a completed wave count off the 2002 lows into its all-time peaks on December 31st. And small caps have outperformed larger cap names for more than 5 years and that cycle too looks ready to reverse meaningfully.

As a result of all of these indicators, we believe the small caps could well lead the way lower in the emerging bearish trend we have identified in the broader market. Specifically, the decline from the 12/31 peaks completed an impulsive wave down either on the 7th or the 12th of January. If the first impulsive wave down ended on the 7th at 612 (IWM $121.79) then the RTY is already within a developing wave 3 down (usually the most drastic decline) that started on the 18th. From those peaks we expect the RTY to fall swiftly to the 560 +/- area (IWM $111); thus this index, under this interpretation calls for weakness from the Fibonacci resistance area of 612-618 (IWM $122-123) with trade moving above 623 (IWM $124.60) forcing us to stand aside. We think this bearish interpretation is a solid 50% probability. If however the RTY ended its first impulse wave down on the 12th at 604 (IWM $120.26), which we assess at a 30% probability, then the bounce that we are currently seeing has Fibonacci resistance higher, at the 629-639 (IWM $124-126.70) area where a good downside risk / reward scenario would be available, with trade moving through 646 (IWM $129) forcing us to the sidelines (not advice).

Both of these interpretations are bearish and we have high confidence in them; the only difference being which Fibonacci resistance level turns back prices and starts the next impulsive wave down toward 560. Like the SPX and NDX, we place a relatively small probability (20%) on the bullish interpretation of price activity from the December 31st peaks. For now then we believe the RTY is already within a 3rd wave down and prices should be rejected by the 612-618 area and then start down towards 560. The analysis suggests weakness against that price area in the next few sessions.

No positions in stocks mentioned.

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