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Bear Market Leading Indicator Signals Potential Sharp Move Ahead

Cory Russell

May 09, 2022 10:56


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In January 2022, the S&P 500 dropped more than 10%, which was seen as an indication of weakness because to a Wyckoff distribution topping formation. Nonetheless, this leading indicator – Russell 2000 around the end of November 2021, at least 1 month before the S&P 500 had a steep plunge of more than 10% - offered many red signals as an early warning.


In 2019, the Russell 2000 will be a bearish leading indicator.


Russell 2000 failed the backup action from September 26 to October 1, 2019, with a break down, test, and confirmation (highlighted in orange circle) of the intermediate support level at 1700, while the S&P 500 attempted a breakout, as indicated in the chart below.


With a bearish momentum bar (second orange circle) on 10 October 2019, Russell 2000 dropped below the support of the swing low at 1630, but S&P 500 failed to break out. As the Russell 2000 led the market down, these two incidents acted as early warning signs of market weakness.


Following that, the Russell 2000 fell below the 1460 support level, tested the support-turned-resistance level, and then reversed from 7-14 December 2019 (third orange circle) to begin the Christmas selloff. Despite the S&P 500 testing support, the Russell 2000 collapse was a leading signal (highlighted in orange circle). Similar to Russell 2000, the S&P 500 eventually broke down and had a 10% selloff in six sessions.


With Russell 2000, you may anticipate the S&P 500's selloff.


As illustrated in the chart below, Russell 2000 futures suffered a failure of backup action on November 26, 2021, when the negative momentum bar (highlighted in orange circles) committed below the resistance-turned-support around 2310.


The failure was notable since it sparked the greatest down wave inside the trading range of 2100-2300. The down wave's large supply was an indication of weakness, since there was distribution on the way down, signaling the start of distribution.


This is a variant of the typical Wyckoff distribution pattern, in which the bearish bias emerges immediately after the first evidence of weakness. To learn how to analyze the bearish structure with volume and when it will be breached, watch the Wyckoff distribution analysis video for the S&P 500.


S&P 500 futures only started to develop a distribution structure as a topping formation, whereas Russell 2000 formed the initial hint of weakness (annotated as SOW0) followed by a re-distribution structure. The Russell 2000 led the way down before the S&P 500 as small cap equities were spread, which was the first red signal.


The second red flag as an early warning of the market selloff came on January 18, 2022, when Russell 2000 broke down from the re-distribution structure (annotated in pink rectangle), which also coincided with the support level at 2100 from the broad trading range that began in March 2021.


Following the break down, another wave of selling (annotated as SOW1) began in Russell 2000, while the S&P 500 saw its first correction (annotated as SOW0) of more than 10% off the top.


From January 24, 2022 until the present, another probable re-distribution structure has emerged. Russell 2000 broke down support at 1900 in the last two weeks, followed by two unsuccessful efforts to rally back up, while the S&P 500 was still testing the support region, which was identical to the scenario described above for 2019. Russell 2000 has issued yet another early warning about market weakness.

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