Charts Say: Go Long the Russell 2000 in February as Small-Caps Set to Shine

In late December, everyone in and out of Wall Street promotes their investment picks for the new year. You can spend about $25 on your local newsstand and get all these forecasts. A month later, and many of the pundits are silent about their ideas and what to do next or now. So with almost one-twelfth of the year over and a lot more ahead, I want to wade in with my best idea -- go long the Russell 2000. My optimistic target is for a rise of 20% to 25% by May or early June.

The Russell 2000, begun in 1984, is formed by listing all companies in descending order by capitalization. In the U.S., the top 3,000 stocks (the 3,000 largest companies) make up the broad-market Russell 3000. The top 1,000 of those companies make up the large-cap Russell 1000, and the bottom 2,000 (the smallest companies) make up the small-cap Russell 2000 Index.

As a technical analyst or chartist I focus on the price movement, volume, and supporting indicators to reach my investment conclusions. I understand the fundamentals of stock valuation but I prefer the technical approach. Let's take a look at some simple charts and indicators.

This is a weekly chart of the Russell 2000, above. On the left side of the chart, you see the 2009 low followed by a major uptrend. The Russell made higher highs and higher lows (the simple definition of an uptrend) until early 2016. The uptrend was broken, but the Russell has since made a new high and a new uptrend line can be drawn. Along the bottom of the price chart are a series of curved lines used to identify cycles. Cycles are everywhere and, in the stock market, one of the dominant cycles is the 4-4-1/2-year cycle. Sometimes this is referred to as the Kitchin cycle. The cycle low or trough has been seen and the crest looks like it will be made in the May/June period of 2017.

The Advance-Decline (A/D) Index is a measure of the breadth of a rally. It dates back to the 1920s, when an analyst by the name of Leonard P. Ayres collected the number of securities rising and declining each day. A strong market has more stocks rising than declining. Technical analysts found from empirical observation that the Advance-Decline line on the New York Stock Exchange peaked four to six months before the broad market peaked. As you can see from the chart above the NYSE, cumulative A/D Index has been going up since 2009. The momentum of the A/D Index or line has turned up (lower panel) so we anticipate further gains.

This third chart, above, is a longer-term look at the Dollar Index, or DXY. The Dollar Index broke out on the upside recently and then made a retracement to the breakout level. Because the major trend of the dollar is up, I would look for the uptrend to resume soon. A rising dollar can be negative drag on the earnings of large multinational companies, but the smaller companies in the Russell 2000 will probably be affected less.

Bottom line: I would go long or add to longs in the Russell 2000 around current levels (1380). A decline below 1325 would weaken the chart picture. Two vehicles for investors who want to track the Russell 2000 are the iShares Russell 2000 ETF (IWM) and the Vanguard Russell 2000 ETF (VTWO) .

More information on TheStreet's guide to trading in the month of February can be found here:

Employees of TheStreet are restricted from owning individual securities.

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