Technical analysts were upbeat on U.S. small-cap stocks Wednesday as they added to gains, a day after a subdued October consumer price index saw the benchmark Russell 2000 lead a broad equity rally, turning the market pecking order upside down.
The 5%-plus Tuesday surge saw the small-cap benchmark Russell 2000
RUT
turn positive for the year. More meaningfully, the move may have allowed the index to carve out an “inverted head-and-shoulders bottom,” said technical analyst Andrew Adams, in a Wednesday note for Saut Strategy.
A head-and-shoulders pattern appears on a price chart as a series of three peaks or — in the case of a potential bottom — troughs. The center peak or trough, which serves as the “head,” must extend beyond the “shoulders.” The pattern is used by technicians to identify potential reversals.
Adams illustrated the pattern in the chart below of the index-tracking iShares Russell 2000 ETF
IWM.
“It’s not a perfect looking pattern given the huge gap up yesterday, but it still has the rough shape of a H&S bottom,” Adams wrote. “And with that gap higher yesterday it did enough to break up through the ‘neckline’ of the pattern, providing additional confirmation.”
What next? If the rally continues to play out as hoped, the size of the pattern implies a minimum run toward the $189 to $190 level for IWM, Adams said, with any pullbacks holding above the green dotted neckline identified in the chart around $174 to $175.
There was a big improvement in breadth on Tuesday as the groups hit hardest by rising yields like small-caps, defensives and banks outperformed, noted technical analyst Kevin Dempter of Renaissance Macro Research, in a note.
“Small-caps saw a whopping 33% of issues making positive volatility alerts and regional banks had their best day since 2020,” he wrote (see chart above).
The Russell’s 5.4% rise on Tuesday was its largest one-day percentage gain since Nov. 10, 2022, outpacing a 1.9% surge for the S&P 500
SPX,
a 1.4% gain for the Dow Jones Industrial Average
DJIA
and the Nasdaq Composite’s 2.4% jump.
The Russell 2000 has underperformed sharply, rising 2.5% for the year to date versus a rise of nearly 35% for the Nasdaq.
See: Russell 2000 outperforms S&P 500 by the most since 2020
Read the full article here
