Chart Of The Day: Russell Could Revisit February Low
The focus will remain on US stock markets today, after Thursday’s big reversal. Watch out for the likes of tech-heavy NASDAQ and the already-underperforming Russell 2000 as Treasury yields, including the 10-year note, continue to press higher amid speculation of a faster tightening cycle from the Fed.
Stocks sunk on Thursday after the Fed Chair Powell said it is appropriate to move a little more quickly on rate increases, adding that a 50-basis point hike will be on the table for the FOMC’s May meeting. Powell’s hawkish remarks have been echoed by several other FOMC members such as Daly and Bullard, with the latter saying the Fed is behind the curve.
With the Fed turning increasingly hawkish, analysts at major banks are calling for even faster hiking. Nomura, for example, expects the Fed to hike by 50bps in May and by 75bps each at the June and July meetings.
Rising rate hike expectations and continued bearish-looking price action on the major indices suggest we may see more selling pressure in the weeks ahead.
Among the major US indices, the Russell is looking particularly vulnerable.
Russell 2000 Daily
Earlier this month, we saw a tentative bearish signal on the Russell when the small-cap US index failed to hold its breakout above a key resistance area circa 2100. The index was already underperforming when that reversal happened and fast forward three weeks, we have seen further bearish price action.
On Thursday, it was once again looking like it was about to break resistance, this time at 2050, only for the bears to step in and halt that rally abruptly. This time, the trigger was more of the same reason why US equities have been falling: a hawkish Fed. As the Fed Chair spoke, US indices reversed sharply and once again the Russell took the brunt of the sell-off, closing around 2.3% lower.
The Russell looks like it wants to head lower given its bearish-looking price action and the current macro backdrop. I wouldn’t be surprised if in the coming days we see a revisit of the February low around 1894, as there will be lots of stops from trapped longs resting beneath that level.
This bearish outlook will only change when we see a clear bullish reversal at lower levels, or if we see the index rise back above Thursday’s high. Any short-term gains that we may see on Friday should be treated cautiously ahead of the weekend. Indeed, the bears that missed out on Thursday’s drop may be looking to buy into any short-term strength today.
