This chart may soon give us important market cues

One of the most important charts to watch in coming weeks and months is the Russell 2000, as it may help to provide a signal for the entire U.S. stock market.

J.C. Parets of Eagle Bay Capital continues to keep an eye on the Russell 2000 index for breakout potential. The Russell is full of smaller-cap stocks that tend to be more volatile than stocks on the S&P 500. As a result, the Russell can often lead both the S&P and the Nasdaq Composite to the upside.

What J.C. is eyeing in particular right now is a potential reverse head-and-shoulders pattern for the Russell 2000 IShares ETF (IWM).


As you can see, the left and right shoulders of the potential pattern are marked by the 2011 and 2012 highs, respectively. The “head” of the pattern is the October 2011 low. In, technical theory, the pattern on a breakout projects a move higher equal to the distance from the shoulder to the head — in this case, $22 to $25 higher for the IWM.

A breakout above the “neckline” marked in pink could prove critical for the entire U.S. stock market. If would be hard to foresee continued gains for more conservative stock groups if one of the riskiest cannot first break through its major resistance.

To the contrary, a breakout would have many market technicians studying the other major market U.S. indices for breakout potential, as well, and likely help to skew the intermediate-term market bias to the upside.

The IWM looks likely to soon break about above neckline resistance or break down below long-term trendline support going back more than a year.

Either way, it could help provide a signal for what could happen to the other major U.S. stock indexes.