The S&P 500 saw a decline of more than 10% in January 2022, which was seen as a sign of weakness from the Wyckoff distribution formations. However, several red flags were provided as an early warning across this major index – the Russell 2000 near the end of November 2021, at least a month before the S&P 500 plunged more than 10%.
Russell 2000 as a Bearish Leading Indicator in 2019
From September 26 through October 1, 2019, Russell 2000 failed to back up as there was a breakdown, test and confirmation (highlighted with orange circle) of the 1700 median support level while the S&P 500 had a breakout attempt, as shown in the chart below.
On October 10, 2019, the Russell 2000 broke through the swing bottom support level at 1630 with a bearish momentum bar (2nd orange circle) while the S&P 500 failed to break. These were two events The red flags were an early warning of market weakness as the Russell 2000 led the way down.
Next, Russell 2000 broke below the support at 1460, tested support-turned-resistance followed by a reversal from December 7-14, 2019 (3rd orange circle) to start the Christmas sell-off. The crash in Russell 2000 was a leading indicator even though the S&P 500 was testing support (highlighted in orange circle). Ultimately, the S&P 500 also collapsed and saw a sharp 10% sell-off in 6 sessions, similar to the Russell 2000.
This distribution pattern in 2019 was similar to what is currently being revealed in 2022 as shown in the Wyckoff upthrust video 3 weeks ago.
Expect to sell S&P 500 with Russell 2000
On November 26, 2021, the Russell 2000 futures failed to move in as the bearish momentum bar (highlighted in circled orange) committed below resistance-turned-support near 2310, as shown in the chart below.
The failure was huge as it led to a sell-off with the biggest downside wave within the trading range between 2100-2300. The heavy display accompanying the bearish wave was a sign of weakness as There was a distribution on the way down, marking the beginning of the distribution.
This is a variation on the classic Wyckoff distribution pattern where a bearish bias does not form until after a sign of weakness. Refer to the Wyckoff Distribution Analysis video for the S&P 500 Index to learn how to interpret a bearish structure with volume and under what conditions it will be violated.
While Russell 2000 formed the first sign of weakness (explained as SOW0) followed by a redistribution structure, only S&P 500 futures began to form a distribution structure as a peak formation. this was First red flag where Russell 2000 led the way down ahead of the S&P 500 Where shares of small companies were distributed.
On January 18, 2022, the Russell 2000 collapse of the redistribution structure (indicated by the pink rectangle), also coincided with the support level at 2100 from the large trading range that started in March 2021, which was the second red flag as an early warning of a market selloff. Another sell-off (shown as SOW1) started in Russell 2000 after the crash while the S&P 500 saw its first correction (denoted as SOW0) of more than 10% from the peak.
Subsequently, another potential redistribution structure was formed from January 24, 2022 to date. In the past two weeks, Russell 2000 broke the support near 1900 followed by two failed attempts to rise again While the S&P 500 was still testing the support area, which was similar to the scenario in 2019 as described above. This is another early warning from Russell 2000 regarding market weakness.
The stock market crash analogue: from price structure to market turnover sequence
Aside from using the Russell 2000 as a leading indicator of a bear market, the price structure and sequence of market turnover closely resemble the stock market crash of 2008.
Watch the video below to see what bearish scenarios you can expect based on the 2008 global financial crisis and at what point these scenarios will break and turn bullish.
With the Russell 2000 leading the way down in the bear market as shown above, the S&P 500 is likely to break below the support at 4100 to start another round of selling with a sharp bearish move, which could be like January 2022. Visit TradePrecise. com to get more stock market insights via email for free.