Another Technical Look At The Russell 2000

The most recent stock market rally that started on May 25th continued in full force yesterday, Tuesday May 31st.  While end of month forces may have been at work, it speaks positive nontheless.

The major U.S. equity indices closed at the highs of the day and as such overcame a good amount of technical resistance zones, although a few hurdles remain to be tackled.

The Russell 2000 small cap index often serves as a leading tell and as such I wanted to take a technical peek at this rebel of an index.

Note the uptrend line in place since late August 2010.  After stabbing down and through this trend trend line on May 16th, price action is now kissing this uptrend line from underneath.  That however remains one of the few resistance points left, and not a very strong one at that.

A close-up look of the Russell 2000 reveals several more pieces to the puzzle.  During the month of May the index made a series of lower highs and lower lows, that is until yesterday.  The downtrend line (light blue) broke yesterday as the index gapped up out of the gate, also overcoming the 50 day moving average (yellow line).  Momentum oscillators such as the Stochastics while above 80 still have room to grow.  Stochastics however can remain overbought for extended periods of times and as such I am not placing much importance on them in the very near term now.  

The banks, while not as important as they used to be simply due to index weightings, are back slowly getting back on their feet.  Note the BKX index yesterday jumped above the 200 day moving average and as such is currently nestled between the 200 and 50 day moving averages and a trading channel that has been in development since January.

While over the past few days the picture has turned from concerning to much more constructive, today is the 1st of the month (1st of June) and could further make or break this tape.  A further rally would in my opinion rally the RUT at the very least to its May highs.  On the RUT specifically, should small caps sell-off today however they could develop a very bearish formation called an evening star candle pattern.  Today will be an important day.  If major equity indices can muster another close above their 50 day moving averages the path of least resistance will remain to the upside.

Happy Trading




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