by Eli Wright
In the last week, Trump has acted on his protectionist campaign promises and withdrawn from TPP, met with union leaders to discuss investing in infrastructure and bringing manufacturing back to the United States,expedited the process for the KeyStone and Dakota Access pipelines, and signed two executive orders expediting the construction of his promised wall between the US and Mexico – which in the aggregate should contribute value to US companies. He has also talked about deregulation and lowering corporate taxes, which would enhance the outlook of small-cap US companies even further.
Yesterday, the S&P 500, NASDAQ and Dow each broke out of their three-week ranges of consolidation and hit record highs. The small-cap Russell 2000, however, is still at essentially the same level as seven weeks ago, at 1,382.
Is there a possible breakout on the horizon?
During the two weeks following the US election, the Russell 2000 soared 13.7% – from 1,184 to 1,347. When global equity traders were spooked ahead of Italy's early December constitutional referendum vote, on fears the Italian financial sector would topple and pull global financials down in tandem, profit-taking drove it 3.5% lower to 1,308, but when the referendum failed, global stocks rebounded. The Russell continued rising as well, jumping 4.7% to 1,392 during the following trading week to 1,392. The Russell then stalled, trading in a narrow +/- 3.5 percent band between 1,340-1,392.
Looking at the technicals, the narrow trading range over the last 1.5 months formed a classic bullish flag pattern. Even when the Russell dropped on Monday, the flag stayed intact, and the decline halted once the index reached strong support at 1,340. Now, the Russell is at 1,382.39, and it’s poised to break out of the upper channel of the flag pattern. Once that line is crossed, the next target is the resistance offered by the Russel’s all-time high of 1,394.
If that level gets broken as well, there won’t be any more upper levels for guidance. However, before reaching much higher, the Russell may come back to retest resistance and challenge the upper flag channel. It’s at those retracements that breakout traders might want to enter their positions.