The Russell-2000 small cap index has underperformed blue chips by a wide margin so far in 2019, held back by U.S. Dollar strength that favors multi-nationals over small domestically-focused companies. Surprisingly, the trade war hasn’t shifted the equation, mostly likely due to growing fears of an economic slowdown. It’s also a lousy time to start a small business, with a handful of mega-companies crushing smaller competitors like bugs.

Seasonality is also working against small cap stocks this summer, with the strongest sector performance typically booked between November and May. However, this long-observed calendar connection didn’t work out well earlier this year, with the Russell topping out in February and hitting a 4-month low in May. Unfortunately, it’s now testing that support level and could break down into the fourth quarter.

IWM Long-Term Chart (2000 - 2019)

IWM
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iShares Russell-2000 Index Fund ETF (IWM) came public in the mid-40s in May 2000, just two months after the bull market ended, and entered an immediate downtrend that carved multiple selling waves into October 2002’s all-time low at 32.30. It tested that support level in the first quarter of 2003, completing a double bottom reversal and entering a strong uptrend that posted new highs in 2004.

The fund topped out at 85.30 in July 2007, three months before October’s bull market top, and carved a head and shoulder pattern with a neckline in the mid-50s. It broke support in September 2008 and dropped like a rock, finding support less than two points above the 2002 low in March 2009. The subsequent recovery wave completed a round trip into the prior high in 2011 and rolled over, building the last stage of a cup and handle pattern that broke to the upside in 2013.

The uptrend has posted three peaks since 2011, drawing a resistance line that now stretches above 190. Selloffs since 2008 have carved a slightly wider trajectory, with support now located near 135. The fund is trading just 12 points above that level right now and could test it for the fifth time if support between 140 and 145 breaks in coming sessions. Given the decade-long persistence, a breakdown should end the long-term uptrend.

IWM Short-Term Chart (2016 - 2019)

IWM
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A Fibonacci grid stretched across the 2016 into 2018 rally places the November 2016 breakout at the .618 retracement level, which was tested successfully in December 2018. A second grid across the 2018 decline shows that momentum stalled in February when the fund lifted above the .618 selloff retracement while price action since that time has nearly completed a head and shoulders pattern with a neckline that’s closely aligned with the .382 rally and selloff retracements.

This symmetry highlights the importance of holding support between 140 and 145, with an H&S breakdown yielding a measured move target right at the December 2018 low. Unfortunately, a trip into that price zone will also signal a potential breakdown of 10-year trendline support. It’s impossible to be more specific because the decline into February 2016 undercut the trendline for about two weeks before trapping bears in a major reversal.

The on balance volume (OBV) accumulation-distribution indicator posted an all-time high with price in August 2018 and entered a distribution phase that ended with price in late December. Buying interest faded in the first quarter of 2019 and OBV has just rolled over to a 7-month low, raising the stake heading into the fourth quarter. Committed buyers will need to show up soon to avoid a retest that could drop the Russell-2000 into a bear market.

The Bottom Line

The Russell-2000 technical outlook has deteriorated since February 2019, raising odds for a test at the December 2018 low.

Disclosure: the author held no positions in aforementioned securities or their derivatives at the time of publication.