Death Cross Signals Another Leg Down in Price Action

RUSSELL 2000 FORECAST:

The Russell 2000 has fallen more than 16% from its November highBearish momentum could accelerate after the appearance of death cross on the daily chartIn this article we discuss the key technical levels to watch out for in the short term in the Russell 2000

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The Russell 2000 has been one of the worst performing averages on Wall Street in recent months. For instance, since its November peak, the small and mid-cap index has plunged more than 15%, nearly entering a bear market. The correction has been triggered by a combination of factors, although monetary policy jitters and economic recovery uncertainty have been two important negative drivers from a fundamental point of view.

From a technical perspective, price action has become quite bearish, with the index moving inside a descending channel since late October. However, this is not the most ominous signal at the moment. The scary cue comes from the appearance of a death cross on the daily chart, a formation that is created when the 50-day SMA falls below the 200-day SMA (from top to bottom).

The death cross suggests short-term selling activity is accelerating and that a long-term downtrend may begin to develop in the underlying security. In order to reduce the likelihood of a false signal, the pattern must be confirmed with a weekly close, although a daily close is used sometimes by more aggressive traders who don’t want to miss a possible big move to the downside.

If we are indeed on the brink of the next leg lower, the retail crowd should keep a close eye on support in the 2,060 area, a line in the sand so to speak. If traders succeed in defending this zone, downside pressure could relent and pave the way for a bounce in the coming sessions, but if the price falls decisively below this floor, all bets are off, as a large pullback could ensue considering the absence of critical support levels in the vicinity. Following this line of thinking, a test of the 2,000 psychological level becomes a very possible scenario should the 2,060 support-region be lost.

In the event the Russell 2000 rotates higher, resistance is seen at 2,105. If bulls manage to push the price above this barrier, we could see a move towards the 2,200 area, but the bearish bias would not disappear until the index breaks out of the descending channel and prints a higher high above the January peak near 2,288.

RUSSELL 2000 TECHNICAL CHART

Russell 2000 Technical Outlook: Death Cross Signals Another Leg Down in Price Action

Russell 2000 Chart prepared using TradingView

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—Written by Diego Colman, Contributor

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