Many tv talking heads are calling for US small caps to lead us on to retest prior all-time highs … they say this basically because they think that the US economy is the world’s strongest and therefore, the asset class most exposed to the US consumer will be the defaulted to leader. Is that what is going to happen?
No one knows that ahead of time, but I default to the price structure of the market to tell me the likely path going forward. Let’s look at the small caps to see what the market says …
Russell 2000 Index Futures (RUT) – Monthly Chart
When you step back and look at the monthly chart, you can see a nice 3-wave price structure. The 2nd wave ended just past the 1.618x extension target, telling traders that we were in fact making a 3-wave structure and to expect Wave 3 to terminate in the 1.272x – 1.618x extension target zone. Price did just that.
If the monthly 3-wave structure is complete, then price will carve out a likely complex corrective pattern but in the end, find support in the SLOT drawn using the price anchors of the entire structure.
Let’s look a little closer at the price structure using the weekly charts …
Russell 2000 Index Futures (RUT) – Weekly Chart #1
Each of the 3-waves in the monthly price pattern formed smaller 3-wave structures inside themselves.
Russell 2000 Index Futures (RUT) – Weekly Chart #2
Having completed a nice looking 3-wave structure into the monthly extension target for the bigger 3rd wave gives me confidence that the monthly chart structure is in fact complete and that we are going to work our way down into support and not just pull-back slightly and then go on to make new all-time highs.
You will see on the daily chart below that the 2nd wave in corrective Wave-A made a nice push into the 1.618x extension target, which tells me that price is making a 3-wave price structure lower here in the first leg of the corrective price pattern.
After that is complete, we will bounce into bigger resistance (wave B) and then down into final support for the corrective pattern we are currently in.
Russell 2000 Index Futures (RUT) – Daily Chart
I expect the RUT to bounce with the rest of the market here … I suspect that resistance will be found/respected at around 1425 in the RUT futures contract and then price to head down to about the 1200 level. That level is right around where the bigger 38.2% SLOT support is, where the 1.272x target is for Wave-A’s 3rd wave and where the bottom of the broadening price pattern (see pattern below).
Russell 2000 Index Futures (RUT) – Weekly Chart #3
Bottom Line – No one can tell the future, but if you understand the structure of price waves, you can get a good idea at times about where price is likely to be headed. Based on my read of the wave structure for the RUT, I think we still need to head lower into a bigger layer of support before we can think about trying to go on to new higher highs.
Cheers … Leaf_West