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What Is the Russell 2000 Index Telling Us?


Looking at the small cap index, we can see no less than four neutral to bearish indicators.

On May 2, 2011 the Russell 2000 (RUT) small-cap index landed at a fresh all-time high. From the March 2009 lows to the May 2011 highs, the measured move equals more than 150%. The S&P 500 (SPY) in comparison rose just over 100% over the same time period.

As the often weaker summer months for stocks are fast approaching and the broader market has given up some gains recently, I wanted to take a look at how the small cap stocks are faring. What I found is no less than four neutral to bearish indications.

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In May the Russell 2000 slightly overthrew the previous all-time high from July 2007. The index has since corrected a little, which is to be expected. The question is, how much correcting does a small cap index have to do after a huge 150% run in just 24 months in order to push meaningfully higher again? My guess; more than the 3.5% it has corrected over the past couple of weeks.

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Earlier this week the Russell 2000 broke below the uptrend line in place since last September, which also coincides with the 50 day moving average (yellow line). That uptrend line and 50 dma are now being re-tested from below. If the RUT can successfully muster a weekly close above those levels the chances favor more upside for the near-term. Should the RUT put in a weekly close well below those two levels, lower prices should ensue.

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The upward trending cone pattern in development for much of 2011 also broke and is being re-tested.

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And let's not forget the head and shoulders pattern that finished developing the right shoulder's neckline on Tuesday. A break and stay below $815 could swing the RUT as low as the $760 area purely from this pattern alone.

While chart trend-lines and patterns can be drawn thousands of different ways, the ones in development on the Russell 2000 do count among the higher probability kind. And because towards the end of cyclical bull markets the small capitalization stocks tend to lag large caps, it should at least be prudent to closely watch the RUT in coming days and weeks for clues to the broader tape.

Happy trading!
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No positions in stocks mentioned.

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