Russell 2000 Technical Outlook: Walking a Slippery Slope
- A potentially concerning technical setup is brewing in the Russell 2000
- The dramatic rise in Q4’20 was historic since its inception in 1978
- Price is within a few percentage points of major support, below which resides a weak foundation
According to Russell, there is $10.5 trillion benchmarked to its flagship Russell 2000 small-cap index. Over the last 12-months through yesterday’s close, the primary tracking ETF, ticker IWM, has an average daily volume of 28.3M shares. Based on closing prices, this equates to $6.24B trading in the ETF on average each day.
Over 12-months from its March 2020 low to its Q1 2021 high, the Russell 2000 gained 145%. Over this same 12-month period, the large-cap U.S. benchmarks gained: NDX 105%; SPX 82%; INDU 82%.
From there, the Russell then spent the next eight months trading in a sideways range, roughly 10% wide, while the large caps trended higher all the way into November. In the first week of November, the Russell 2000 did make a “bullish breakout” from the 8-month range to new 52-week and all-time highs; however, there was no follow-through as it has since declined in each of the following four weeks ending today, Dec. 3.
It is common technical price action for breakouts to temporarily retrace back to the prior resistance level, which then often acts as support, before then resuming higher, aka the “retest.” However, the retrace for Russell 2000 not only knifed down below the top of the prior 8-month range (expected support), it is already approaching the bottom of this ~10% range which is a critical support level. The importance of this clearly defined, 8-month support level is high and quite relevant to the present given the price action which preceded it.
During the 12 months and 145% gain off the March 2020 lows, there is a noteworthy 12-week period that stands out from both a historic and technical perspective. Starting in the first week of November 2020 through the week ending Jan. 15, the Russell 2000 gained 41%, based on weekly closing prices. The following week marked the high in the weekly RSI and momentum has since been in decline.
The catalysts at the beginning of this major advance started with the U.S. presidential election in the first week of November, followed by three better than expected Covid vaccine efficacy results announced over the following three Mondays. To put it not so mildly, stocks went gangbusters. This was the transition from the “working from home” trade to the “reopening” trade.
The 41% gain is historic as it represents both the highest performing 12-week period over the last ten years and the 3rd highest on record since the Russell 2000’s inception in 1978. The two highest 12-week performances took place in 1982 (43%) and 2009 (43%). And while 1982 and 2009 were the start of two major bull markets, there is a glaring difference between those two periods and now.
The 12-week, 43% gain in 1982 started just one week after the Russell 2000 bottomed following a 30% decline from the prior year’s high in 1981. The 43% gain in 2009 started at the low following a 60% decline from its 2007 high. Essentially the two record 12-week, 43% performances are measuring the very initial rebound following steep selloffs. However, the 41% gain in 2020/2021 started 32 weeks after the index bottomed, over which time the Russell had already gained as much as 71%. Very different!
Whether we are in the early stages of a long-term multi-year bull market (my bias) or nearing the top of the cycle is not the debate here. We’re not going there. What’s noteworthy is that in 1982 and 2009, price never retraced back into the price range spanning their respective 43% gains. Those moves were the very beginning of major lows that continued higher and never looked back. All future retracements/corrections/crashes took place at higher levels. However, today the Russell 2000 is less than 3% from entering the price range spanning its 41% gain. This carries significant technical importance best seen in its tracking ETF, IWM.
IWM’s weekly period chart plots the “Volume at Price” bars on the left y-axis, as opposed to the traditional way of seeing volume across time periods on the x-axis. Given the historic 41% gain over only 12-weeks’ time (white shaded box), there is relatively very little volume history in the $173 - $210/$211 range, more than 20% wide. Think of these low-volume ranges as air pockets or trap doors where there is very little technical support. They are created by a prior steep uptrend over a relatively short period of time. And if price ever comes back down the other side of the mountain, so to speak, it can often fall faster than what one would expect upon entering the low volume zone. We saw examples of this in Q4 2018 with Regional Banks, which in short time fully gave back the prior steep uptrend previously made in late 2016. It also happened with spot silver in April of 2013 when it knifed through the prior steep uptrend from 2010.
Now, price could hold support, never enter the low volume zone, and the Russell may never look back like 1982 and 1990. However, if price breaks below that range, we could see accelerating, “gappy” price action to the downside. The key support line for the IWM is ~$210/$211.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Brian Joyce
Nasdaq
Brian Joyce, CMT is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with more than two decades of capital markets experience. He is a Charted Market Technician and regularly writes technical analysis commentary. Brian focuses on helping Nasdaq’s Financial and SPAC companies, among others, understand the trading in their stock and the broader financial markets.
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