Russell 2000 Indicator - Watch for bearish divergence DJIA

Russell 200 -

NOVEMBER’S IMPULSE PATTERN COMPLETED AT 1560.00! – WATCH FOR BEARISH DIVERGENCE DJIA

Many investors believe the Russell 2000 small-cap index leads the price movements of the large-cap indices like the S&P and Dow Jones (DJIA), but the reality is that its relationship is often inconsistent. Yes, sometimes it does ‘lead’ but on other occasions, it ‘lags’ too. That doesn’t make it a redundant indicator, it just means that bullish/bearish divergences will occasionally alternate depending on the market forces at the time.

As all major U.S. indices approach important upside targets that end 3^rd wave sequences within the five wave impulse pattern developing from the Feb.’16 low, it’s important to watch for bearish divergences between the small-cap Russell 2000 and the S&P and Dow.       

August’s Impulse Completed

The Russell 2000’s five wave impulse upswing from last August’s low of 1348.80 (futures) represents the fifth wave within the larger 3^rd in progress from the June ’16 Brexit low – see fig #1. As you can see from this chart, this fifth wave, labelled as minuette wave [v], subdivides into a smaller impulse sequence, (i)-(ii)-(iii)-(iv)-(v). It has structurally satisfied completion already, into the early-December high of 1561.90.

This can be verified using Fib-Price-Ratios – for example, wave (v) unfolds by a commonly recurring fib. 61.8% ratio of waves (i)-(iii) at 1561.90, just 1.3 points from the ‘idealised’ measurement. It has subsequently traded lower to 1506.70, enough to qualify a reversal-signature.

As things stand, the S&P is scheduled to make a bid to a slightly higher-high later this week before it also triggers a ‘reversal-signature’ decline, so it will be interesting to see of some short-term bearish divergence occurs between these two.  

Conclusion

Short-term bearish divergence can be misleading but this depends on the Elliott Wave pattern structure. An index could simply be lagging, as the Russell was back in October/November, but now that pattern alignment with the S&P has occurred, any sign of bearish divergence at this juncture becomes much more interesting.

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