Home Headlines Too Fast, Too Furious: Credit Suisse Points Out Russell 2000 Nears Critical Resistance Level 

Too Fast, Too Furious: Credit Suisse Points Out Russell 2000 Nears Critical Resistance Level 

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The Russell 2000 Index has risen too fast and too furious in the first quarter, up nearly 15% year-to-date on reflation hopes, vaccine rollouts, and stimulus. 

Small Caps have historically been highly correlated with lower quality credit risk as they are – by definition – more dependent on levered debt. The last few months have seen that relationship utterly destroyed as investors appear to have chased lottery tickets…

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That surge has also erased all the relative underperformance relative to the Nasdaq since the March collapse.

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With Russell 2000 now at a stunning 35% above its 200-day moving-average – by far a record…

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And Small Caps have never been more expensive…

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On the session, the small caps index is up over 2% to around 2264, nearing a significant resistance level of the upper bound of a decades-long ascending channel. 

Credit Suisse’s equity strategist David Sneddon told clients this week that the small caps index’s upside could extend to 2445. Here’s what he told clients:

The Russell has held high-level support at 2256 and we look for a retest of the recent bearish “reversal day” high at 2318. Above here should clear the way for a move to 2327 next, then the top of the long-term channel from 2010 (see weekly chart above) at 2235, with the top of a further channel from the March low last year seen at 2345. We would again look for a fresh cap for now in this 2335/45 zone. Big picture though we look for the uptrend to extend in due course to 2445.

Support moves to 2264 initially, then 2256, below which should clear the way for a fall to the 38.2% retracement of the rally from late January and rising 13- day exponential average at 2224/22, with a fresh floor expected here.

Above the “reversal day” high at 2318 should see strength extend to retest the top of the twin trend channels at 2335/45.

But as we must note, the weekly Russell 2000 Index, given Sneddon’s chart art below, shows a decade’s long ascending channel where technicians may observe resistance between 2445-2500.

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Sneddon outlines important resistance levels: 2395/2400, 2375, 2366, 2345/50, 2327/35, 2318/20, 2304, 2294 and critical support levels that price must hold or downside will be seen: 2264, 2256, 2246, 2234/33, 2224/22, 2202/01, 2195, 2179.

One look at relative strength index on a 14 count, and it too is at record over bought territory and may have already peaked. While the double-banded oscillator can stay in overbought territory for some time, it’s important to note that a correction could be nearing. 

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Maybe this week is the start of it?