The bear market leading indicator signals a strong potential advance
The S&P 500 fell more than 10% in January 2022, which was seen as a sign of weakness from a leading Wyckoff distribution formation. Still, several red flags were issued as an early warning via this leading indicator – Russell 2000 towards the end of November 2021, at least 1 month before the S&P 500 recorded a sharp decline of more than 10%.
Russell 2000 as bearish leading indicator in 2019
From September 26 to October 1, 2019, Russell 2000 experienced a failed backstop action where there was a breakdown, test and confirmation (highlighted in orange circle) of the intermediate support level at 1700 while the S&P 500 had a breakout attempt as shown in the chart below.
On October 10, 2019, the Russell 2000 broke below swing low support at 4:30 p.m. with a bearish momentum bar (second orange circle) while the S&P 500 experienced a breakout failure. These two events were red flags served as an early warning of market weakness as Russell 2000 led the way down.
Subsequently, Russell 2000 broke below support at 1460, tested support turned resistance followed by a reversal on December 7-14, 2019 (third orange circle) to begin Christmas selling. The Russell 2000 breakdown was a leading indicator despite the S&P 500 testing support (highlighted in orange circle). Eventually, the S&P 500 also crashed and saw a strong 10% sell-off in 6 sessions, similar to the Russell 2000.
These distribution patterns in 2019 were similar to what is currently unfolding in 2022, as explained in the Wyckoff upthrust video 3 weeks ago.
Predict the S&P 500 selloff with Russell 2000
On November 26, 2021, Russell 2000 futures experienced failed backstop action where the bearish momentum bar (highlighted in orange) traded below resistance-turned-support near 2310 as shown in the graph below.
The failure was important as it triggered a sell off with the biggest downside wave in the 2100-2300 trading range. The ample supply that accompanied the downside wave was a sign of weakness where there was a cast downhill, which marked the beginning of the cast.
This is a variation of the classic Wyckoff distribution pattern where the bearish bias only forms after the sign of weakness. Refer to the Wyckoff Distribution Analysis video for the S&P 500 for how to interpret the bearish pattern with volume and under what circumstances it will be violated.
While the Russell 2000 formed the first sign of weakness (annotated SOW0) followed by a payout structure, the S&P 500 futures only started to form a payout structure as the top formation. It was the first red flag where Russell 2000 led the way ahead of S&P 500 that the small cap shares have been distributed.
On January 18, 2022, Russell 2000 broke out of the redistribution structure (marked in a pink rectangle), also coincided with the support level at 2100 of the large trading range started in March 2021, which was the second flag red as an early warning of market liquidation. Another wave of selling (labeled SOW1) started at Russell 2000 after the drop while the S&P 500 experienced its first correction (labeled SOW0) of more than 10% from the top.
Subsequently, another potential payout structure formed from January 24, 2022 to present. In the past 2 weeks, Russell 2000 broke support around 1900 followed by 2 failed attempts to rally while the S&P 500 was still testing the support zone, which was similar to the 2019 scenario, as elaborated above. This is another early warning from Russell 2000 of market weakness.
Stock market crash analog: from price structure to market rotation sequence
Other than using the Russell 2000 as a bear market leading indicator, the price structure and rotational sequence of the market is very similar to the stock market crash of 2008.
Watch the video below to find out what bearish scenarios you can expect based on the 2008 Global Financial Crisis and when these scenarios will be breached and turn bullish.
As the Russell 2000 led the bear market decline, as explained above, the S&P 500 is likely to break below the support at 4100 to kick off another round of selling with a steep decline, which could be like January 2022. Visit TradePrecise.com for free stock market information via email.