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S&P 500 experienced more than 10% drop in January 2022, which was considered a sign of weakness from a Wyckoff distribution topping formation. Yet, multiple red flags were provided as early warning via this leading indicator – Russell 2000 near the end of November 2021, at least 1 month before S&P 500 had a sharp drop of more than 10%.
Russell 2000 As A Bearish Leading Indicator In 2019
From 26 September till 1 October 2019, Russell 2000 had a failure of the backup action where there was a break down, test and a confirmation (highlighted in orange circle) of the intermediate support level at 1700 while S&P 500 had a breakout attempt, as shown in the chart below.
On 10 October 2019, Russell 2000 broke below the support of the swing low at 1630 with a bearish momentum bar (second orange circle) while S&P 500 had a failure of the breakout. These two events were the red flags served as early warning of the weakness in the market as Russell 2000 led the way down.
Subsequently, Russell 2000 broke below the support at 1460, tested the support-turned-resistance followed by a reversal from 7-14 December 2019 (third orange circle) to start the selloff going into Christmas. The breakdown in Russell 2000 was a leading indicator despite S&P 500 was testing the support (highlighted in orange circle). Eventually S&P 500 also broke down and had a sharp selloff of 10% in 6 sessions, similar to Russell 2000.
These distribution pattern back in 2019 were similar to what’s currently unfolding in 2022 as explained in the Wyckoff upthrust video 3 weeks ago.
Anticipate The Selloff of S&P 500 With Russell 2000
On 26 November 2021 Russell 2000 futures had a failure of the backup action where the bearish momentum bar (highlighted in orange circled) committed below the resistance-turned-support near 2310, as shown in the chart below.
The failure was significant as it triggered a selloff with the largest down wave within the trading range between 2100-2300. The heavy supply accompanied the down wave was a sign of weakness where there was distribution on the way down, which marked the beginning of distribution.
This is a variation of the classical Wyckoff distribution pattern where the bearish bias is only formed after the sign of weakness. Refer to the Wyckoff distribution analysis video for S&P 500 to find out how to interpret the bearish structure with the volume and at what circumstances will it be violated.
While Russell 2000 formed the first sign of weakness (annotated as SOW0) followed by a re-distribution structure, S&P 500 futures only began to form a distribution structure as a topping formation. This was the first red flag where Russell 2000 led the way down before S&P 500 as the small cap stocks were distributed.