Thursday's Market Minute: Small-Caps In Small-Range: Big Volatility Coming?

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The Russell 2000 futures contract feels like being on a ship when there’s no waves or wind – just eerily calm water. Small-caps are winding up like a coiled spring, with price action bouncing within a progressively narrowing triangle shape for most of the year. This shape is being formed from the yearly lows and highs in February and March respectively, with another even steeper shorter-term triangle converging from the August lows and the September highs. This type of price action can present major opportunities for trend traders when breakouts occur.

Technical indicators show a striking lack of conviction in either direction as of Wednesday’s close. The ADX (which measures trend strength) sits below 17, with a reading below 20 typically suggesting weak or no trend. The MACD and Parabolic SAR both saw numerous flip-flops in recent months. Most of the commonly followed moving averages (9-, 21-, and 63-day Exponential Moving Averages, as well as 50-, 100-, and 200-day Simple Moving Averages) are in the unusual situation of trending sideways while also being clumped together in a relatively tight range. They now sit between roughly 2,223 to 2,246, so any move beyond this range could be a directional tell. The Volume Profile for 2021 shows the area near 2,225 has seen the heaviest trading by far, so this adds extra weight to this zone.

During the next few days, it could be crucial to watch the confluence of the 100-day Simple Moving Average and the upper short-term trendline near 2245, as well as the triangle’s lower boundary near about 2195. Beyond that, the boundaries of the larger triangle are presently around 2137 and 2295.
Lots to stay dialed in on as we head into the middle of October, stay nimble

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