The beaten-down Russell 2000 Small-Cap Index has reached a confluence of significant potential near-term support levels.
Stocks are off to a historically poor start to 2016. For some market segments, however, this is far from the beginning of their difficulties. Small-cap stocks, in particular, have been especially bloodied since topping in June of last year. As a result, it’s not surprising to see that small-caps are among the first groups to encounter what we would consider a potentially significant price level of support.
Now, if you have followed us for awhile, you know that we are far from optimistic regarding the longer-term outlook for stocks. That said, there are some price levels that should serve as, at least temporary, bounce points. Based on our read of the chart, the Russell 2000 Small-Cap Index is hitting one as we write.
Specifically, the following not-insignificant levels align near the 1032 level in the Russell 2000:
- The 61.8% Fibonacci Retracement of the rally from the early 2013 breakout into all-time high territory to the 2015 top
- The 38.2% Fibonacci Retracement of the 2011-2015 rally
- The post-2009 Up trendline connecting the 2011 lows
- The 1000-day (approx. 200-week) simple moving average
- The October 2014 lows
Each of these analyses by themselves are noteworthy. The fact that they all align at almost the same exact level is significant. We don’t believe that is a coincidence as there is an order to markets that, upon first blush or to the uninitiated, may seem totally random. And we often say that the more significant analyses that line up in the same vicinity, the more confidence we have that the level is relevant.
What should we expect out of a bounce, if it occurs. This quintet really is a substantial set of levels so it should produce more than yesterday’s half-a-day rally in the Russell 2000. Under normal circumstances, we would expect the area to provide at least an intermediate-term low, that is, lasting several months. However, due to current circumstances (i.e., a potential developing cyclical market top including a possible recent game-changing breakdown), perhaps expectations should be ratcheted down a little.
So, we would not be surprised to see the Russell 2000 attempt to bounce, or at least hold this area for several weeks to perhaps months. At a minimum, stock risk, which had been heavy in the small-cap area, has perhaps shifted in a material fashion toward the larger-cap areas that have more room to drop before encountering similar potential support.
Then again, outside of a brief false breakdown, should this level fail to provide as much as a speed bump and the Russell 2000 slices right through it, then perhaps a more devastating market decline is already at hand.
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More [6] from Dana Lyons, JLFMI and My401kPro.
