The focus this year has largely been on the decline of mega-cap tech stocks…
But small-cap stocks haven’t been spared either.
In fact, the Russell 2000 small-cap index has taken a beating.
After sustaining a nearly 31% loss from its November 2021 peak, the small-cap market has investors wondering when the bleeding will stop.
While it isn’t clear whether the Russell has struck a definite bottom, the chart setup shows a potentially explosive move to the upside.
Let’s look at the Russell 2000 Futures (RTY) price chart to see what I mean…
I’ve outlined three important things…
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First, we have a parallel trend channel (blue lines).
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Second, we have a trend-following indicator – the 50-period moving average (MA – red line).
When the market is bearish, it tends to trade below this moving average. And when the market is bullish, it tends to trade above it.
That’s why it would be a strong piece of technical evidence if the market can break above the 50-period MA…
And it’s what I expect to see if RTY can also break out of the parallel trend channel.
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Finally, we have my favorite momentum indicator – the Relative Strength Index (RSI – lower half of chart).
As a market nears a top or bottom, the RSI will typically start diverging from the market’s price action… as seen on the RTY price chart.
Although prices have steadily declined since November 2021, the RSI registered its most extreme reading at the beginning of December.
Since then, the RSI hasn’t been able to make a lower low and has started to trend higher.
RSI divergence is often a leading indicator…
Meaning, you’ll see divergence appear on a price chart before the market puts in a bottom and reverses.
That’s why it’s important to combine the RSI with other pieces of technical analysis, to identify the highest-probability trading opportunities.
If the market remains in this channel, then it’ll continue to trade lower.
Notice how this channel has contained RTY’s entire decline since the market topped out in November.
Breaking out of this channel would be a great initial sign that the market has bottomed out.
The small-cap market is telling me the current bear market is running out of steam. This lines up with the buy signal I spotted in the S&P 500 last week.
If a breakout of the parallel trend channel and of the 50-period MA combine, then there could be a sustained rally over the next few months.
Happy trading,
Imre Gams
Analyst, Market Minute
Reader Mailbag
In today’s mailbag, Earnings Trader member Lance shares his recent gains…
I acted on your recent sell recommendation and made a 52% profit.
– Lance B.
… And Jeff Clark Trader member Jimson thanks Jeff, while Ross comments on his Memorial Day essay…
Hi Jeff,
It’s amazing to read your lectures. Thank you so much for improving my option skills.
– Jimson W.
Thank you, Jeff. This is by far your best and most important post ever.
– Ross W.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].