Technical Note: Is the Russell 2000 Hammering Out a Major Top?

In recent weeks, I’ve laid out a few considerations on See It Market around small caps that I think will prove important in the coming weeks and months, whether your preferred time frame is measured in minutes or days.  “Small cap” may sound niche or of limited relevance; but these observations carry important implications for medium and large caps, as well.

Tying them all together, here’s a brief review:

  •  Secular Small Cap Out-performance May Be Ending. This is a possible long-term turn I’ve covered (here, here, here) over the last year.  Whether this will prove to be the case won’t ultimately be proven by the market for months/years: the thesis that large caps will assume a position of relative strength is a strategic theme, carrying little actionable weight for active trader/investors.  Still, there are some compelling reasons to believe this and it informs the current market context.
  • Small Caps Have Been Slammed, While Large Caps Have Remained Above the Fray: this may be about to change. A look at large cap sectors suggests their headline indices – i.e. DJIA and SPXare playing defense, even if all-time highs insist otherwise.

Against this backdrop and and market cap interplay, the Russell 2000 (RUT; TF below) is building out an important 6-month potential Complex Head & Shoulders Top pattern as it repetitively bounces off 1080-1090. Could this pattern be the much-rumored “topping process” that signals significantly lower prices later in 2014?  Click the chart laying out the pattern below to zoom in on the general notes and basic trade guidelines found there:

Russell 2000

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Twitter: @andrewunknown and @seeitmarket

Author holds net short exposure to the Russell 2000 at the time of publication.  Commentary provided is for educational purposes only and in no way constitutes trading or investment advice.

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.