The hammer candle retest of the channel resistance-turned-support line on the Russell 2000 chart in Thursday’s session could be a key factor in determining the intermediate term direction of the small cap stocks, and potentially the broader market indices.
The small cap stocks have been underperforming the DJIA, the S&P 500, and the NASDAQ Composite year-to-date, and it is unlikely that relationship can continue without eventually being a drag on those indices. Small cap’s often lead the markets either higher or lower and a failure of the Russell to hold the 1390 level could be the straw that breaks the back of the broader and overextended market rally. On the other hand, a sharp bounce off the channel top and a catch-up move could help to sustain the current market momentum. The Russell 2000 is the index to watch over the next several sessions.