Good evening Slope! I wanted to take a look tonight at a market structure within the Russell 2000 that I am tracking. As you know, the Russell has yet to break its 2011 high, diverging from SPX. Let's take a look at how the Russell formed its 2011 top, and see if there is anything we can gain from it.
Below is a daily chart of the Russell. Notice the three key peaks I have noted. Peak 1 is the ultimate high that was formed. After the high, there are two additional key peaks that were made. Peak 2 came close to testing the highs, but failed. It then made a slight retracement, before quickly moving back up to form Peak 3. Peak 3 also failed to reclaim Peak 2. When the trendline breaks, connecting the June '11 lows through July '11 lows, a collapse ensues.
My contention is that the Russell is developing a similar market structure, with a topping pattern, but on a larger scale. Take a look at the Russell below, since the 2009 low. It has formed a similar large head & shoulders pattern, but on a larger scale. The smaller left shoulder peaked in April of 2010. From there we move up to the ultimate high, Peak 1, which formed in May 2011. The similarities continue with Peak 2 coming close to reclaiming the highs, but failing. A small retracement follows, and then the Russell move up to form Peak 3. Peak 3 again fails to reclaim Peak 2. The key trendline to watch is that connecting the Oct '11 low through the June '12 low. We are close to testing that trendline at present. The key question is: Will we see a waterfall decline a la Aug '11, but on a larger scale?
Below is a picture of what that waterfall might look like. There is a great deal of bearish potential in the markets at the moment. I am bearish, very bearish. We shall see…