H&S Suggests Russell 2000 Might Decline by a Whopping 20%

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The next few days will be critical for the Russell 2000 index as it looks like the market is carving out a major head and shoulders pattern. The Russell 2000 index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index and provides a great exposure to smaller U.S. firms.

In late 2017 and early 2018, the index formed what could be the right shoulder of the head and shoulders pattern, while the right shoulder has been forming since October 2018. The neckline goes via the February 9 low and October low. The pattern will be put in motion on the price closing below the October low of 1453. If the price closes below the October the pattern suggests that the index may decline by a whopping 20% and reach 1161. The patterns take profit level is derived by subtracting between the high point of the pattern and the neckline from the October low.

I doubt that the market will trade as low as 1161 unless the U.S. economy slides into a recession, but a decline to the August 2017 low of 1348 would be reasonable if the U.S. government increases tariffs on imports from China. It is also interesting to note that the right shoulder looks to be a smaller triangle with a pattern of 1405 which is a level below the October low and therefore suggests that there is higher than a normal chance of the head and shoulders will trigger. For the bearish pressure to abate, I suspect the index needs to stop creating lower highs, something it might do if buyers manage to lift the index above the November 19 high of 1532.

Time will tell if the market will trigger the head and shoulders pattern or not, but for now, it looks like there will not be a good Christmas for bullish stock market investors or traders.

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Russell 2000 CFD Daily Chart

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About the Author

Alejandro Zambrano

Alejandro Zambrano combines extensive professional experience and a common-sense attitude to offer LondiniumFX members a strategy that focuses on making fewer, smarter trades and building members’ understanding of the markets and the rationale behind investing. He is also the Chief Market Analyst with TradeCaptain.com, and before founding LondiniumFX, Mr. Zambrano was Head Analyst at FXCM’s London desk.