Yesterday, the small-cap stock market index Russell 2000 climbed above the 1300 mark for the first time in its history. A comparison between its current level and the low of 342 in March, 2009 gives us an idea of the phenomenal uptrend the Russell 2000 has been riding. The fact, that a long position initiated anywhere between 342 and 1300 would have led to a profit today, can certainly tempt investors to believe the price they have to pay does not matter, because the index will continue to rise. This is a very dangerous assumption, because no trend lasts forever. Let’s check what the market has in mind for the Russell 2000.
The weekly chart above allows us to see Russell 2000’s entire uptrend since 2009 through the perspective of the Elliott Wave Principle. It shows that the index has been drawing a five-wave impulse for the last almost eight years. The price has even obeyed the guideline of alternation – wave (II) is a running flat, while wave (IV) is a sharp zig-zag correction. Which leads us to wave (V) which has just exceeded the top of wave (III), signalling that the uptrend has entered its final phase. According to the theory, every impulse is followed by a three-wave correction in the opposite direction. The structure of wave (V) suggests it is too early to call a top and the Russell 2000 could even go for 1400. Nevertheless, the greater part of the bull market is already behind us and the next bear market seems to be just around the corner. Once wave (V) is over, a three-wave decline back to the support of wave (IV) between 1000 and 900 is likely to occur. If history is any guide, those who believe the uptrend will last forever usually suffer the most, when it eventually ends.
