With one trading day left for the week, the US small cap index Russell 2000 is about to close below a key support level. After recently confirming a break of its long term uptrend 3 weeks ago, the Russell 2000 index looks likely to head significantly lower in the medium term as it meets its next support level of 1,110 on a weekly chart.
After climbing all of 2016 from the lows set in January and February this year, the index had been on a tear rising from a low of 943 in early February, to a high for 2016 of 1,263 in September for a gain of around 34% in the 7 month period.
In the weekly chart below I have added the momentum indicator, which measures the strength of a trend. If momentum is rising whilst the chart price is rising it indicators conviction behind the trend. On the other hand if prices are falling and momentum is also falling and goes negative like the weekly chart currently is for the Russell 2000, this means there is no support for the index and the likely direction is to continue to head lower.
Since early September the momentum has been steadily falling as the strength in the trend has been weakening. I marked the recent fall for momentum into negative territory with the circle to show the bearish indicators supporting the weak index.
An important note: With trading its important not to utilize any one indicator on its own to determine direction. Rather using a number of different indicators together is important to confirm a direction and trigger for a trade.
One more note before moving to the daily chart, another bearish indicator for the Russell 2000 index is that the weekly price has recently closed below 10 week simple moving average (pink line).
Taking a closer view of the Russell 2000 index, you will notice a few key things. Firstly the closing price of the index yesterday the 27th October 2016, was the same as the old resistance level set on the 8th June were it closed at the same price 1,189.95. The resistance has now become support.
Secondly the daily chart has also broken its uptrend recently (marked with a blue line) as well as support of 1,212 this week.
In addition the momentum indicator has been in the negative for about 2 to 3 weeks now confirming the break of trend and weakness within the index.
Key Support Level - 1,189
The next few days will be important to see if the index can hold the support level of 1189 in the interim despite the weakness. If support fails at that level the next support is a fall to 1,146 which is another 3.6% away from the current closing price.
Provided it can hold support for the short term, if the index can have a short term rally higher the next resistance level is the previous support of 1,212.
Small Caps A Leading Indicator On Strength Of The Economy
Small cap stocks provide a good leading indicator on the strength or weakness of an economy. The reasoning behind this is that small cap stocks are inherently more riskier than big large cap stocks and blue chip stocks. Therefore they tend to move ahead of their large counter party stocks in either a bullish or bearish direction.
Considering the weakness of this index and break down of key support levels, it does not bode well for the general bigger index the S&P 500. If the Russell 2000 is an indication of the likely weakness of the US economy, eventually the S&P 500 will follow the Russell 2000 to the downside.
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Disclaimer: This post was for educational purposes only, and all the information contained within this post is not to be considered as advice or a recommendation of any kind. If you require advice or assistance please seek a licensed professional who can provide these services.
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I am a private trader and equities investor that loves the trading and investing world, following the markets and everything in between.