Historically, market indices have often been harbingers of broader market moves, giving astute investors a heads-up about possible upcoming shifts. In the recent past, the Russell index – an often-overlooked benchmark compared to its peers like the S&P 500 or the Dow Jones – played this role to perfection.
In November 2021, while the limelight was still very much on other major indices, the Russell sent out a significant warning sign. It was the first among its peers to exhibit signs of vulnerability. For context, the index remained relatively flat throughout 2021, consolidating within a narrow range. This consistency was suddenly interrupted when it surged to a new all-time high in November of that year. But, in a twist that caught many by surprise, this peak was short-lived. The index soon faltered, leading to a 'Bull Trap' pattern. A 'Bull Trap' is a technical pattern that occurs when a security's price breaks above a resistance level but then reverses direction, trapping traders or investors who acted on the breakout.
I remember tweeting about it on November 10, 2021.
And here's what happened soon after.
RTY, 1d -- 2021 Bull Trap Pattern
Now, fast forward to 2023, and the Russell is once again hinting at underlying weaknesses in the market. As I delved deeper into its technical structure, one aspect stood out prominently: the index's continuous struggles with the 38.2% Fibonacci retracement level. For those unfamiliar with the term, Fibonacci retracement levels are horizontal lines that indicate potential support or resistance levels. The 38.2% level, in particular, is a critical technical threshold, and the Russell's repeated failures to break and sustain above this level is concerning.
RTY, 1d -- 2023 Failed Attempts To Clear 38.2% Fibonacci Level
While the Russell may not be the most glamorous of indices, its movements and patterns deserve attention. As the adage goes, "History doesn't repeat itself, but it often rhymes." And if the Russell's patterns are anything to go by, we might be in for an interesting period in the stock market.