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Russell 2000: Stretched, But Don’t Fight the Trend

The Russell 2000 led Tuesday's charge and remains trending


The small-cap Russell 2000 index is higher by almost 4% year-to-date and outpacing both the S&P 500 as well as the Nasdaq-100.

It hasn’t been like that all year, though. In fact, small-cap stocks only really began to outperform off the early February lows. But before we look under the hood of the Russell 2000, let’s first get a little perspective on where we are and how we marched here.

Russell 2000: The Path to New Highs

For longer-term views, I like to use logarithmic charts, which smooth the charts and give a clearer picture. On the below weekly logarithmic chart of the Russell 2000, note that in early 2013, the index overcame a major resistance area and really hasn’t looked back since.

Click to Enlarge

After a 250% run off the 2009 lows and a nearly 40% sprint over the past 12 months, is the index beginning to looked stretched through the long-term lens?

You bet!

But at the same time, it’s still trending higher. And note that the Russell 2000 consolidated from April 2011 until January 2013, so the rally since 2009 did not happen in a straight shot.

The mother trendline (logarithmic) off the 2009 lows remains firmly in place, and not until this line is broken would it be time to reconsider a complete change of heart on this tape.

But to be clear, that’s different than saying you shouldn’t be marginally more cautious right now.

On the daily chart, the somewhat surreal orderly up-trending channel in place since late 2012 only got violated once, and that was during the early February fake-out shake-out.

Click to Enlarge

Was it prudent to heed the breakdown warning in early February? For sure … but it’s also important to understand that 12-monthtrends most often don’t snap in one try. The V-shaped recovery off the early February lows indicates that there is room up toward 1,240-1,250 in coming weeks/months, which would also coincide with the upper end of the channel (black parallels).

Upside target equivalents on the iShares Russell 200 ETF (IWM) are between $124 and $125.

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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.

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