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Russell 2000 is Exploring New Terrain

After months of lagging, the small-cap stocks index is moving up sharply.

The Russell 2000 is in uncharted territory.

“The rise in small stocks basically started on Monday, and after a pause, on Tuesday, the buying pressure exploded,” said James “Rev Shark” Deporre in Real Money.

“A breakout pattern like that in the Russell suggests that it can move substantially higher,” Deporre wrote on Real Money recently. “There’s an old saying in technical analysis: "the longer base, the higher the space" for an upside move, which is applicable in this situation.”

What is most notable about the Russell 2000 is that it has been basing for around nine months. “While many folks have stayed focused on the S&P 500 and Nasdaq, small-caps and secondary stocks have done little,” Deporre noted. “They’re not nearly as extended as the senior indexes.”

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According to Rev Shark, the charts of the S&P 500 and Nasdaq are notably different at this point.

That said, investors shouldn’t assume that stocks are going to go straight up. At this point, it would not be at all surprising to see some churning and pullbacks as gains are consolidated.

The Nasdaq in particular “needs a rest and so do many stocks. In a strong market, that rest may be brief and shallow. It doesn't take much to relieve overbought conditions. Don't rush to read anything profound into some downside volatility.” Deporre cautioned.

Still, “strong markets tend to stay sticky to the upside because those that have missed out or are unhappy with their returns will be more inclined to buy dips and pullbacks,” Deporre said. “The fear of missing out is very strong when the indexes are at highs, and that helps to create underlying support. Strong markets don't tend to collapse unless there is some sort of surprising news suddenly.”

Get more trading strategies and investing insights from the contributors on Real Money.