The most recent stock market rally that started on May 25 continued in full force yesterday. While end-of-month forces may have been at work, it is positive nonetheless.
The major U.S. equity indices closed at the highs of the day, overcoming 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 trendline on May 16, 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 of 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 so I am not placing much importance on them in the very short term.
The banks, while not as important as they used to be simply due to index weightings, are slowly getting back on their feet.
Note that the KBW Bank Index (BKX) index yesterday jumped above the 200-day moving average and is currently nestled between the 200-day 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 first of the month and could make or break this tape. A further rally would, in my opinion, could take the Russell 2000 to, at the very least, its May highs. However, on the Russell 2000 specifically, should small caps sell off today 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.
