Watch Small Cap and the Materials

With today’s close above 804, there is the chance that the Russell 2000’s recent close below its 50 DMA will prove to be a onetime event for the first part of March or maybe for the entire month of March.

Specifically, should the Russell 2000 climb above 810, there is a decent technical shot that this small cap index will try to climb higher and above this year’s high at 833 and something that would couple the Russell 2000 with the other equity indices that have reversed the downtrend born of last summer’s correction.  Such potential trading action would probably serve to create a more peaked out RW as indicated by the light trendlines to compete with last year’s highs.

Until, however, the Russell 2000 climbs above those levels potentially, its current multi-touch Rising Wedge is the pattern to treat as the real RW in the RUT right now and this pattern is confirmed to take the Russell 2000 down toward its target of 602.  There is the possibility, though, that it will give way to the bigger potential pattern with the same target and this can be watched by levels at 794 and 799 on the downside and 810 and 833 on the upside with the bear case finding support perhaps with an unclosed intraday gap at 788.

One reason to think the Russell 2000’s current RW will remain good is found in a seemingly unlikely spot or the XLB.

As can be seen in the daily chart above, the XLB has failed to reverse its intermediate-term downtrend as well with its positioning beneath its third Bull Fan Line after having closed two days in a row beneath its 50 DMA to confirm a Double Top that would serve to take the XLB beneath its 200 DMA.

The similarity to make note of the with the Russell 2000 is the failure to reverse the intermediate-term downtrend thus far while the pattern to watch here is that Double Top that reconfirms at $36.40 for a target of about $35 and a level supported by an unclosed gap in that area along with an unclosed gap at $34.

Interestingly and worth noting is yet another unclosed fraction gap in the XLB at $36.17 and one that will very much set the Double Top back in motion should it close.

It makes sense, then, to continue to watch small cap and the materials as the possible bearish tell around the future of the risk rally in the weeks ahead with the VIX’s Rounding Bottom still suggest that it is at risk even though not in one straight shot down.