The Russell 2000 small cap index is testing a key level of resistance stemming from the 2009 lows.

In our view, the biggest development in the equity markets over the past 2 weeks, in addition to and related to the leadership rotation, has been the ability of previously lagging areas to overcome significant resistance levels on their respective charts. Today’s Chart Of The Day reveals yet another challenge -- or is it an opportunity? -- in a former laggard, small caps. Specifically, it is developing on the chart of the popular Russell 2000 Small Cap Index.

The Russell 2000 (RUT) was one of the canaries in the stock market coal mine a year ago. After topping in June, it began to lag the large caps significantly. And after failing to approach new highs last July, it led the stock market lower during the August-September rout. Similarly, after a relatively meager bounce last fall, the RUT again led the market lower into the February lows.

Based on its post-February bounce, however, we cannot include it in the category with the other laggards that have just begun to emerge. Though it certainly started from a more extreme “oversold” level, the RUT has still been one of the more robust and consistent performers since the February low. As of today, the index is up slightly over 20% from those lows. And every time the index has been faced with apparent resistance on its chart, it has been up to the challenge.

The RUT’s stiffest challenge yet, however, may be facing it presently in the form of the underside of the Up trendline stemming from the 2009 lows.

You’ll notice on the chart that the post-2009 trendline connects the lows from March 2009, September 2011, November 2012, September 2015 and December 2015. You’ll also notice that it slices through one date -- October 3, 2011.

While some folks may object to this trendline “violation”, we are not opposed to such practice in certain instances, especially when it is a single out-lying day. Trendlines are a subjective tool and their connection points do not always line up precisely. However, our view is that the point is to find the line that most accurately represents the trend, delineating support when price is above and resistance when below. That is why it is called a TREND-line.

Anyway, on January 6, the Russell 2000 broke down below the trendline, leading to an immediate 12% drop over the next 10 days. Since its eventual February low, however, the RUT has out-performed much of the market, again gaining more than 20%. Along the way, it has been able to surmount any and all resistance in its path. This includes last Monday’s hurdle of both the post-June Down trendline and the 200-day moving average, both shown on the chart. This marked the 1st time in exactly 8 months -- as the August collapse was commencing -- that the RUT traded above the 200-day MA.

You’ll also notice a few other resistance points of interest on the chart, including the 500-day moving average and the 61.8% Fibonacci Retracement of the June-February decline. Both those lines of consequence sit just above the 1160 level and should not be dismissed as potential resistance.

However, the piece de resistance (sorry) is the post-2009 Up trendline that is now limiting the trajectory of the RUT. In fact, today marks the 6th straight day in which the index was rejected by the trendline. The line currently sits somewhere between 1148-1150. The Russell 2000 closed today at 1150.73 so it is making an unmistakable run at recovering the trendline.

Now, we never want to anticipate a breakout, so it remains resistance until it’s not. However, considering all of the other levels that the RUT has overcome, as well as all of the other key indexes that have surmounted similar lines of resistance, one certainly has to have an open mind about the potential for the Russell 2000 to recapture the trendline.

So will the post-2009 Up trendline continue to be resistance, or is it simply providing another opportunity for the index to hurdle over and accelerate its run? We don’t know what will happen, but feel pretty confident about the significance of the trendline. Either way, it could provide both bulls and bears with a (trend)line in the sand to trade against.

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More from Dana Lyons, JLFMI and My401kPro.

The beaten-down Russell 2000 Small-Cap Index has reached a confluence of significant potential near-term support levels.

Stocks are off to a historically poor start to 2016. For some market segments, however, this is far from the beginning of their difficulties. Small-cap stocks, in particular, have been especially bloodied since topping in June of last year. As a result, it’s not surprising to see that small-caps are among the first groups to encounter what we would consider a potentially significant price level of support.

Now, if you have followed us for awhile, you know that we are far from optimistic regarding the longer-term outlook for stocks. That said, there are some price levels that should serve as, at least temporary, bounce points. Based on our read of the chart, the Russell 2000 Small-Cap Index is hitting one as we write.

Specifically, the following not-insignificant levels align near the 1032 level in the Russell 2000:

The 61.8% Fibonacci Retracement of the rally from the early 2013 breakout into all-time high territory to the 2015 top

The 38.2% Fibonacci Retracement of the 2011-2015 rally

The post-2009 Up trendline connecting the 2011 lows

The 1000-day (approx. 200-week) simple moving average

The October 2014 lows

Each of these analyses by themselves are noteworthy. The fact that they all align at almost the same exact level is significant. We don’t believe that is a coincidence as there is an order to markets that, upon first blush or to the uninitiated, may seem totally random. And we often say that the more significant analyses that line up in the same vicinity, the more confidence we have that the level is relevant.

What should we expect out of a bounce, if it occurs. This quintet really is a substantial set of levels so it should produce more than yesterday’s half-a-day rally in the Russell 2000. Under normal circumstances, we would expect the area to provide at least an intermediate-term low, that is, lasting several months. However, due to current circumstances (i.e., a potential developing cyclical market top including a possible recent game-changing breakdown), perhaps expectations should be ratcheted down a little.

So, we would not be surprised to see the Russell 2000 attempt to bounce, or at least hold this area for several weeks to perhaps months. At a minimum, stock risk, which had been heavy in the small-cap area, has perhaps shifted in a material fashion toward the larger-cap areas that have more room to drop before encountering similar potential support.

Then again, outside of a brief false breakdown, should this level fail to provide as much as a speed bump and the Russell 2000 slices right through it, then perhaps a more devastating market decline is already at hand.

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More from Dana Lyons, JLFMI and My401kPro.

One question that seems to come up rather frequently is, “when will the current bull market most likely come to an end?” Now in its seventh year, the current bull market is DJIA’s fourth longest using the standard bear market definition of a 20% decline, but it is only the fifth best by gain. Well, absent a fully functioning time machine, no one really knows. All that can really be done is compare the ends of past bull markets with present day conditions in an effort to identify some early warning signs. 

One sign that has appeared this year is the outperformance of small-cap stocks when compared to large-cap stocks. An easy comparison can be represented by simply taking the Russell 2000 and dividing it by the Russell 1000 as found on the bottom of page 110 of the Stock Trader’s Almanac 2015. A similar chart appears next.

After underperforming the S&P500 for most of last year, the Russell2000 is approaching an important breakout level relative to its large-cap counterparts. Here is a daily ratio chart of the Russell2000 ETF $IWM vs the S&P500 ETF $SPY. Late last year, the ratio broke above its downtrend line from the highs last year. The next step is to start to put in higher highs. A break above the January highs would confirm that.

What does this mean? Bigger picture it's hard to take outperformance out of the "riskier" smaller-cap names as a bad thing. If there is real risk appetite out there for US Equities, we want to see money flowing into small-caps at a faster rate than into the less volatile, larger-cap stocks.

Aside from the broader market implications, a pair trade where one short the S&P500 in equivalent nominal amounts to being long the Russell2000, a breakout above this resistance would trigger that opportunity. Risk management-wise, I see no reason to be in this particular pair trade if the ratio is below the late January highs.

This is an interesting chart to watch. I came into the year looking for small and mid-cap stocks to outperform the large-caps. So far we are seeing this outperformance as we close out the first quarter. Moving forward, a breakout here would confirm this trend is likely here to stay.

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Historically, December is a good month to own small caps. However, the tendency for a nasty mid-month pullback is often overlooked. Will this correction send small caps even lower, or is it a good time to buy?

December has a reputation to be a good month for stocks, but that reputation is taking one on the chin as we speak.

In reality, December sports some seasonal ebbs and flows often ignored. Stocks tend to rally in the first part of the month, correct in the middle and finish strong.

Small caps in particular are subject to this up-down-up pattern. The December 7 Profit Radar Report referred to this tendency when it wrote that:

“Small cap stocks tend to shine in December. History suggests we may see a pullback before the next surge. The green circles mark potential entry levels.”

The updated Russell 2000 chart below includes the green circles mentioned in the December 7 PRR update.

The Russell 2000 in particular and stocks in general fell more than many expected, turning the potential year-end buy signal into a ‘no guts, no glory’ trade.

It certainly takes guts to push the buy button after this nasty sell off. Although seasonality suggests a favorable outcome for small cap buyers, it’s prudent to wait for technicals to confirm the initial stages of a reversal.

The iShares Russell 2000 ETF (NYSEArca: IWM) and Direxion Daily Small Cap Bull 3X ETF (NYSEArca: TNA) are two ways to play strong year-end small cap seasonality.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

On the close today, the Russell 2000 small-cap index was down over 1% and is once again down year-to-date. Large caps, measured by the Russell 1000 also declined today, but the index is currently up 10.5% for the year. Since last closing at a new all-time high on March 4, 2014, the Russell 2000 has had more than its fair share of underperformance. Such poor performance has frequently been cited as a “worrisome” market divergence. However this divergence is not at all unusual from March to late November than many would believe.

In the chart below, thirty-six years of daily data for the Russell 2000 index of smaller companies are divided by the Russell 1000 index of largest companies, and then compressed into a single year to show a yearly pattern. When the graph is descending, big blue chips are outperforming smaller companies; when the graph is rising, smaller companies are moving up faster than their larger brethren.

In a typical year the smaller fry stay on the sidelines while the big boys are on the field. Then, around late November, small stocks begin to wake up and in mid-December, they take off. Should the Russell 2000 fail to show signs of strength by the end of the year, then its lagging performance would then be a concern.