Technical analysts are showing optimism towards U.S. small-cap stocks following a substantial gain on Tuesday. The recent release of the subdued October Consumer Price Index (CPI) has led to a rally in equity markets, causing a shift in the market hierarchy.
The benchmark for small-cap stocks, Russell 2000 (RUT), experienced a surge of over 5% on Tuesday, pushing it into positive territory for the year. This move has potentially signaled the formation of an “inverted head-and-shoulders bottom,” according to technical analyst Andrew Adams in his recent note for Saut Strategy.
An inverted head-and-shoulders pattern is a formation that appears on a price chart and consists of three peaks or troughs. In the case of a potential bottom, the center peak or trough, known as the “head,” extends beyond the surrounding “shoulders.” Technicians use this pattern to identify possible reversals in market trends.
To illustrate this pattern, Adams shared a chart depicting the movements of the iShares Russell 2000 ETF (IWM).
“While it may not be a perfect representation due to the significant gap up yesterday, it still bears the rough shape of an inverted head-and-shoulders bottom,” noted Adams. “Furthermore, with the gap higher observed yesterday, it has successfully broken through the ‘neckline’ of the pattern, providing additional confirmation.”
This positive development indicates a potential trend shift in the small-cap stocks market. Technical analysts will continue to closely monitor these stocks for further signs of a reversal.
Rally Forecasts and Market Insights
The recent rally in the stock market has shown promising signs, with analysts predicting a potential upward trend for the Russell 2000 (IWM) index. According to expert Adam, if the rally continues as anticipated, IWM could see a significant rise towards the $189 to $190 level. It is worth noting that any potential pullbacks are expected to remain above the green dotted neckline, situated at approximately $174 to $175.
The market has witnessed a notable improvement in breadth on Tuesday, particularly among sectors that have been heavily impacted by rising yields. Renowned technical analyst Kevin Dempter of Renaissance Macro Research reported that small-caps, defensive stocks, and banks experienced positive performance during this period. In fact, Dempter mentioned that small-caps had an impressive 33% of issues exhibiting positive volatility alerts, while regional banks saw their best day since 2020.
The Russell 2000 index demonstrated exceptional growth on Tuesday, surging by 5.4%. This impressive one-day percentage gain was the highest observed since the memorable date of November 10, 2022. Comparatively, the S&P 500, Dow Jones Industrial Average (DJIA), and Nasdaq Composite experienced more modest increases of 1.9%, 1.4%, and 2.4% respectively.
Although the Russell 2000 has underperformed when compared to the Nasdaq, its year-to-date growth shows a positive trajectory. To be precise, the index has risen by 2.5% so far this year, while the Nasdaq has showcased a substantial rise of nearly 35%.
For further insight, refer to the chart above illustrating the outperformance of the Russell 2000 over the S&P 500, which has been recorded as the most significant since 2020.
