Stalking on the Russel 2000 Index: what’s next?
This summer I wrote an article about the suggestion of stalking the small cap stocks Russel 2000 Index (1). Just like a cat stalks its prey looking for the best possible moment to pounce, so a trader can stalk an entry to get the best price for entry.
The reason was because on this Index it is present a not so common pattern: the “orthodox broadening formation” (2). This kind of pattern was present also on the Dow Jones Industrial Index, but it was luckily negated (3).
Last week we had a potential and positive sign that also on this Index the pattern could be negated. We have several signs of strength, but we are still in the early stages of potential medium-term growth.
Since last article, the Index proceeded under the resistance formed by the uptrend line of the broadening formation with an incredible resilience, and this last week we had the breakout.
After the break of the relative strength ratio downtrend line vs. the S&P500 on November 2016 (a), the indicator has been always on flattening mode and now we have a second breakout (b), followed by an up-cross breakout signal from MACD oscillator.
Ftse Russell published in 2015 a research paper that examined the Russell 2000 Index in rising interest rate environments (4). The conclusion was that over the last three periods of rising interest rates (1994, 1999 and 2004), small cap returns wobbled early on, only to recover from intra-year losses by the end of the following 12 months – finishing with positive returns 12 months after 1999 and 2004 Fed announcements. Russell 2000 Index sectors reacted differently in each of the rate hike cycles evaluated, with seemingly no clear winners and losers.
Looking at the last two years charts of Russell Sectors, in the last month the strongest one in terms of Relative strength is the Russell 2000 sub sector Industrial Materials & Processes. From the following chart we can see that Relative Strength ratio anticipated at the end of August (a) the breakout of the trading range price channel (b) begun in late 2016.
(1)https://www.marketplus.ch/news/summer-stalking-on-the-russel-index.html
(2)https://www.marketplus.ch/news/why-should-you-look-at-russell-2000-index.html
(3)https://www.marketplus.ch/news/when-will-the-dow-jones-crash.html
Mario Valentino GUFFANTI CFTe – SAMT Vice President – Swiss Italian Chapter – mario.guffanti@samt-org.ch
Disclaimer: the above article is for general information and educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.