Russell 2000 index enters a state of stable disequilibrium
Small-cap stocks retreated sharply on the first trading day of the week as concerns about the Fed and interest rates mounted. The closely-watched Russell 2000 index plunged by more than 2.3% and settled at the lowest point since January 30th. Other American indices like the Dow Jones and the Nasdaq 100 also plunged as the US dollar rose.
FOMC minutes aheadCopy link to section
The Russell 2000 and other American indices have derailed because of the rising fears about the Federal Reserve. Recent economic numbers have shown that the country was doing moderately well, giving the Fed more room to continue hiking. In a report on Tuesday, an analyst at Goldman Sachs said that the Fed could hike by another 50 basis points this year.
“We have the perfect combination of factors for the Fed to hike rates. The jobless rate has crashed to a 53-year low while inflation remains stubbornly high. Retail sales have surged, signaling that the consumer remains healthy. Three more hikes of 0.25% could be necessary.”
Speaking of the Fed, an analyst at Susquehanna told the WSJ:
“We keep seeing this pattern of exuberance and then disappointment. I think we will see markets calm, but until then we are going to see big cycles of volatility.”
Fed minutes, which will come out on Wednesday will provide more information about this. In its meeting, the bank decided to hike interest rates by 0.25% and pointed to further hikes. In most periods, indices like the Russel underperform in periods of high-interest rates.
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The index will react to the upcoming corporate earnings from the US. Constituent companies like Wolverine Worldwide, Garmin, and Travel + Leisure will publish their results in the premarket, Other companies to watch will be Fiverr, Wix.com, IMAX, and Nvidia among others.
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Russell 2000 technical analysisCopy link to section
Conducting a technical analysis can provide more information about what to expect in an asset. On the daily chart, we see that the Russell index managed to move below the important support level at $1,902, the lowest point on February 10. This was an important level since it was the neckline of a slanting double-top pattern. The index also plunged below the key support level at $1,906, the highest point on November 15.
It is also sitting at the 61.8% Fibonacci Retracement level while the Relative Strength Index (RSI) has drifted downwards. It has moved below the neural point at 50. Therefore, because of the double-top pattern, the index will likely continue falling as sellers target the next key support at $1,850. The stop-loss of this trade is at $1,906.