Russell 2000 has reached a critical juncture, with the IWM (iShares Russell 2000 ETF) at a crossroads for an extended period. There are two distinct possibilities, and one of them may materialize soon.
From a bullish perspective, Russell 2000 is forming a prolonged pattern, potentially breaking into a powerful bullish formation known as a high base. A crucial aspect is its consolidation below the BigRed, or the 200-day Moving Average (MA), and a resistance zone that persisted throughout 2023 and part of 2022. If it successfully breaches these three resistance levels, there's a strong likelihood that Russell 2000 will experience a rapid ascent towards the falling upper trend line, approximately around 190, represented by the blue dotted line. Breaking through this resistance could signal the start of an extended bull market for small caps.
On the flip side, if it fails to break through and the resistance proves formidable, the consequences could be dire for IWM and the broader market, with the possibility of no Santa rally or any significant upward movement in 2024.
Analyzing the volume, the lower trading activity during the high base formation suggests a lack of sellers, supporting a bullish outlook. Additionally, neither the Relative Strength Index (RSI) nor the Moving Average Convergence Divergence (MACD) indicators are signaling overbought conditions, leaving ample room for a potential bullish run.
In conclusion, given that 30% of Russell 2000 comprises small regional banks, which often drive this ETF, the upcoming PCE data could be a make-or-break situation. Exercise caution when trading small caps, as movements can be swift and in either direction.