The Russell 2000 And Its Long-term Channel Analysis


The global rout in equities took its toll on US small and midcap stocks too.

“With Friday action, all indexes are now negative on the year, but with the Russell 2000 (INDEXRUSSELL:RUT) maintaining a relative performance lead at -1.7% YTD vs. the Russell Midcap (INDEXRUSSELL:RMCC) at -2.3% YTD and S&P 500 INDEX (INDEXCBOE:SPX) at -3.1%,” observe Citi analysts Scott T Chronert and Louis L Odette in their latest research note “SMID Cap ‘Rap’ – Testing the Channel.”

Russell 2000 in a rising channel

In a technical examination of the Russell 2000 (INDEXRUSSELL:RUT), the Citi analysts point out that the Russell 2000 has moved up inside a bullish channel in place since November 2012 as shown in the chart below.

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A rising channel, such as the Russell 2000 (INDEXRUSSELL:RUT) above, is a technical pattern that shows a continuing bullish trend.

In such a channel, the lower line dotted you see above constitutes the main trend line, whereas the upper band is known as the channel line.

The stock, or the Russell 2000 (INDEXRUSSELL:RUT) in this case, maintains its upside trajectory through a sequence of higher highs that stop at the upper (channel) line, and higher lows that are supported by the lower (main trend) line.

A break of the main trend line to the downside puts a question mark on the validity of the current uptrend.

The six-monthly chart of the Russell 2000

Citi also look at the Russell 2000 (INDEXRUSSELL:RUT)’s performance over the latest six months and find that it too is bound inside a well-formed rising channel as shown below.

Russell 2000 (INDEXRUSSELL:RUT)-channel-six-months

On closer examination observe that this channel is a subset of the main 12-month channel.

Citi’s channel-based bearish targets

Since it is assumed that once prices correct from the upper channel they head towards the lower support line, Citi have estimated the following targets for the Russell 2000 (INDEXRUSSELL:RUT), which obviously are short-term in nature.

  • 1140— bottom of the six month trend/channel
  • 1118—equivalent to a -5% decline from the recent 1181 high
  • 1115—bottom of the channel in place since Nov ‘12

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