On Tuesday, global equities sold out for the second day. At the time of writing, US futures for all four major indices were also declining, with contracts being the main declines.
Although it recorded new all-time highs during Monday's Wall Street session, that was not the case for the small cap index. On the contrary, the benchmark fell for the third straight session.
Cyclical stocks around the world lead the declines, and stocks listed on the Russell 2000 are in that sweet spot.
Companies on the Russell 2000 represent value stocks – smaller, domestic companies that were hammered during pandemic lockdowns, when consumers were unable to contact those establishments. After Americans grew tired of spending on their homes and making purchases through technology, and as vaccines rolled out, the reflation trade lifted value stocks that were under pressure during last year's recession.
Recently, value stocks have outperformed growth stocks, mainly companies in the technology sector that have thrived in a stay-at-home world. Since its March 2020 low, the Russell 2000 Index is up 128%. It was a staggering +144% in March 2021, showing some of the most fantastic returns in stock market history.
But the Delta variant of COVID continues to increase and social restrictions around the world are being restored. Investors are wondering if stocks of the pandemic darlings are the stocks worth betting on right now. The jury is still out, but here's what the Russell 2000's technical features indicate:
The index's three-day sell-off completed a bullish wedge, bearish after its previous five-day straight decline. That happened because dip buyers gave up and cashed out, leaving only bears in the fray.
Note: The wedge developed exactly between 100 and 200 DMAs, making it a technical pressure point on the map. In addition, the wedge formed exactly on the neckline of the large top, which varies since the beginning of the year.
If bearish dynamics within the wedge continue as expected, it will push the benchmark below 200 DMA, and perhaps more importantly, below the July 19 low, which turned out to be a bear trap. A new low would reinforce the downtrend.
Trading Strategies – Short Position Setup
Conservative traders should wait for the price to finally complete the top, as described above.
Moderate traders would go short on a return move that encounters resistance at the wedge.
Aggressive traders can short at will, provided they understand the added risk of being ahead of the market and trade on a tight, pre-set plan to which they are committed. Here's an example:
Trade sample
Input: 2.203
Stop Loss: 2.253
Risk: 50 points
Target: 2003
Reward: 200 points
Risk: Reward Ratio: 1:4
Author's note: This is just an example. And it's not necessarily the only, real way to approach this trade. Nor is it the analysis. It's in the body of the text. If you haven't read and understood it, DO NOT try to trade it. Even if our analysis is perfect, it is based on static past performance. Investors don't behave the same way every time, so stats on past performance can generally only be somewhat predictable. Moreover, our analysis may of course be wrong.
The goal of a professional trader is not to win every trade. That is impossible. All they try to do is control their luck while working based on statistical results and hoping to win overall. Before entering into a trade, close your eyes and imagine that the trade is losing. If you can't handle that, DO NOT go into trading. Your trading plans should include your budget, temperament and timing. Until you learn how to write a custom plan, you can follow ours, with the goal of learning, not making a profit. Or you end up with neither. Guaranteed. And there is no refund.
