The Russell 2000 – Future Leader, But Which Way

• Posted by Greg Harmon
• on November 7th, 2014

The Russell 2000 has been bouncing around 10% higher then 10% lower seemingly every other month. It is driving traders crazy. But if you look at it on a long scale (below) like an investor it has really just been consolidating all year long after completing the AB=CD pattern from the 2009 bottom. A 240% gain. Isn’t it entitled to rest a bit after that?

That consolidation can lead to a big move after 13 months of nothing. But which way? For that you need to look at the shorter term picture. Zooming in to the daily chart the volatility of the last 9 months is readily apparent. And there are signs that the Russell 2000 could take the lead to the upside. but there are also lingering signals that could make for a downside case.

Starting with the bull case the move off of the October bottom has been unrelenting. The small bull flag that is building now would measure to 122 conservatively on an upside break, and possibly even 129. Also the next target from the Butterfly harmonic reversal is a full retracement to the all time high. The RSI is making new highs and is in the bullish zone with a rising MACD. The price is over the SMA’s, but not by very much. Rising price. Supporting momentum, and patterns pushing up. Great news!

But what about the bear case. That rocket ship higher still has not made a new high. If price rolls over here it is the definition of a falling trend. Lower lows and lower highs. That lower high also becomes important with the RSI making a new higher high. This creates the possibility of a Negative RSI Reversal until the price can make a higher high. That reversal would target a new lower low, below the October 15th low. Another concern is that the leg higher form 111 has happened on declining volume. Uh oh!

So which will it end up being? It will likely show its hand very soon. And as a technician I can be on either side. A move over the September 3rd high at 117.80 and it is good to go to new highs. But a fall back under 115 raises the prospect of a retracement lower and a new lows. in the meantime enjoy the show.

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