Chart of the Day: Russell 2000 Topping Out?
Pinchas Cohen | Jan 27, 2022 15:35
Ever since Federal Reserve chair Jerome Powell shocked markets at the end of November 2021 with his suddenly hawkish about-face on US monetary policy, investors have been selling off stocks. Tech shares and small caps were especially pummeled.
As a result, the small cap Russell 2000 Index lost almost 12% of value, about 1% less than the tech-heavy NASDAQ 100. The broader S&P 500 fell 8.75% while the mega cap, value stock-laden Dow Jones retreated less than 6%.
The market has been repricing assets according to the prospect of more expensive dollars, making the most highly valuated stocks no longer a bargain.
Both the Russell 2000 and the NASDAQ 100 outperformed from the March 2020 bottom until their respective peaks in November, with the Russell 2000 having gained 146.5% during that period while the NASDAQ 100 climbed 137%.
The Russell 2000's trajectory was so stellar between March 2020 and November 2021, it outperformed the SPX and Dow, even though the SPX and Dow continued rising after November. Indeed, the S&P gained 84% till it fell early this month while the Dow increased just 65.8% before it slumped in early January as well.
Now, some are suggesting that the small cap index could be bottoming out, as it's down almost 19% from its November peak. We're more pessimistic. We see it crossing the 20% threshold into bear market territory next.
The Russell 2000 posted a descending series of peaks and troughs, establishing a downtrend, as the benchmark topped out from a range it was in since February 2021. The range slumped just after the 50 DMA crossed below the 200 DMA, triggering a Death Cross.
h2 Trading Strategies/h2Conservative traders should wait for a return move that retests the integrity of the neckline before considering shorting the index.
Moderate traders would also wait for a corrective rally, but for a better entry if not for resistance confirmation.
Aggressive traders could enter a long contrarian position, counting on a return move, having found support at the bottom of a falling channel.
Trade Sample – Contrarian Long Position
- Entry: 1,950
- Stop-Loss: 1,930
- Risk: 20 points
- Target: 2,050
- Reward: 100 points
- Risk-Reward Ratio: 1:5
Get The App
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.