Breaking Down Or Holding The Line?

Small Caps


After breaking out above long-term resistance just weeks ago, the widely-followed small caps index is all the way back down to long-term support. Was it a false break out about to be negated? Or is the Russell 2000 index just teasing traders and investors to test their mettle?

Whatever the case, it is true that buyers and buying volume returned on Friday, an indicator of the strength of resistance levels. With cryptocurrencies tanking over the weekend, new tensions over the Russian troop build-up at the Ukraine border and analysts trying to figure out the Fed’s next move — it’s a nervous time for stocks.

For the close-up look, here’s the hourly price chart of the Russell 2000:

Russell 2000 hourly price chart, 12 5 21.

Although the small caps index remains below both the 50-hour and 200-hour moving averages, you can see the positive divergences forming on the relative strength index (RSI, above the price chart) and the moving average convergence/divergence indicator (MACD, below the chart). Note the massive increase in mostly buying volume during the final hour of trading on Friday.

This is the daily price chart for the Russell 2000:

Russell 2000 daily price chart, 12 5 21.

The small caps index has remained above the July low which is the last time big volume showed up. The relative strength indicator is showing an “oversold” reading and the MACD is getting there as well. It’s a negative the price has tanked below the 2 moving averages. Note, however, that Friday’s closing price made it to above the Thursday and Wednesday lows.

The weekly Russell 2000 price chart looks like this:

Russell 2000 small caps index, weekly price chart, 12 5 21.

Look at how clearly it broke out above the upper trendline (connecting the February/March highs with the June/July highs) and then broke back down below it in November/December on heavy volume. It’s below the 50-week moving average now and the technical indicators have diverged negatively from price. So far, the lower trendline that connects the February/March lows with the July/August lows has held.

Here’s the point-and-figure chart for the Russell 2000:

Russell 2000 small caps index, point-and-figure price chart.

On this old-school charting method, it’s clear that the price remains well above the blue uptrend line, a positive sign. You can see that the Russell 2000 remains above the 2021 lows, even with this week’s heavy selling. In the upper left corner, note that the P&F Pattern of “high pole warning” on 11/22 turned out to be accurate. To get back to positive, the index need to close above the 244 level. Closes below 208 would suggest further weakness.

The benefit of price chart analysis is that you don’t need a narrative or “story” to make decisions. Identifying patterns and levels is imperfect but it’s probably better than guessing what Jerome Powell might say next week or the week after.