Cups, Sharks and the Russell 2000

• Posted by Greg Harmon
• on May 6th, 2016

The Russell 2000 pulled the broad market out of the depths of February. It continued higher until reaching a peak 2 weeks ago. Since then it has not had such a good ride. It has fallen a little less than 5%, not a huge pullback given the 22% rise that preceded it. The real question though is will it continue to fall or will it reverse soon.

The chart below shows two overlapping patterns that suggest the downside is not over yet. The yellow pattern is a Cup and Handle. The Cup has been built, with the pullback being the handle. If the Russell 2000 is just digesting then it should not fall below the 105 area.

The two orange triangles represent a bearish harmonic Shark pattern. This reached its Potential Reversal Zone (PRZ) 2 weeks ago and triggered to the downside. The first target would be a 38.2% retracement of the pattern, or to 107.56. Failure there would target 102.79.

Both of these patterns look for more downside, and momentum supports that too. The RSI and MACD are both falling. But both also remain in bullish ranges. The Bollinger Bands® are pointing higher and price is near the bottom band. The 50 day SMA close by may also be an area to attract buyers.

For now The Russell 2000 is in limbo. A move under the 50 day and lower Bollinger Band at about 109 would add weight to extended downside. A stall and reversal before breaking 107.5 would add weight to the case for it just digesting the long run higher and prepping for the next leg up.

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