At InvestingHaven we are all about understanding (future) directions of markets based on leading indicators. In other words we want to look at some specific data points on some specific charts and use that info to forecast prices of other markets. Sounds complicated? That’s what it is, especially defining the leading indicators and the price points. Because in the end it is just 1% of price points that have any relevant meaning to investors, something we defined in Tsaklanos his 1/99 Investing Principles. When it comes to global stock markets, we identified already a long time ago that the Russell 2000 index is the leading indicator, and specifically 1625 points is the line in the sand. Stated differently, once the Russell 2000 index crosses 1625 points we will know for sure there is new bull market (continuation of the 10 year bull market) in U.S. stocks. This will push global stocks also higher, and confirm there is no stock market crash scenario until 2022.
Reading charts is an art in and on itself.
One of the important things to understand is that each chart has its own ‘DNA’. This is a typical recurring pattern which can be simple (one and the same pattern) or complex (multiple simultaneous patterns which may have different formats).
When it comes to the Russell 200 Index we know this is our leading indicator for stock markets. It helps us determine RISK ON vs RISK OFF waves.
Its ‘DNA’ is a typical pattern of triangles (purple lines on below chart) and horizontal support areas (red shaded areas).
With this in mind what we observe on its chart is pretty simple:
- The rising triangle (RISK ON wave) was completed in January of 2018.
- Since then there was a RISK OFF wave. The horizontal support pattern was the next thing to watch!
- Horizontal support at 1300 points was respected, meaning the bears were not able to create a stock market crash.
Going forward, we will know for sure that the next RISK ON wave is there once the Russell 2000 crosses 1625 points (dotted purple line).
This is an illustration of how to read the chart of the Russell 2000 in order to help with decision making for other stocks.