I have been following the progress of a potential bull flag pattern on the Russell 2000 Index (RUT) chart for several weeks. The flagpole portion of the pattern is the result of the strong move off the October lows, and the flag itself formed during the horizontal channel consolidation that followed.
The upper border of the flag in the 1189.25 area has been acting as resistance, and the lower border near 1153.50 as support. A break above pattern resistance projects a price target the length of the flagpole measured from the top of the flag. It is a significant move, equivalent to the October surge, and it would take the index through the upper end of the larger horizontal channel it has been trading in since the beginning of the year. This clearly bullish technical setup has an additional seasonality component going for it. December is usually the strongest month of the year for stocks, and the performance of the small-caps during this period is even better than that of the broader market.
The first performance chart shows the percentage of months in which the Russell 2000 closed higher than it opened over the last 20 years and the average gain or loss. December is clearly the strongest month, closing higher than it opened 90% of the time and with a 3.5% average gain. Over this same period the S&P 500 (SPX) closed higher in December 70% of the time and the Nasdaq Composite (COMPQ) closed higher 60% of the time, with smaller gains. The Russell is the clear winner on this time frame but performance improves over a shorter nine-year period.
The next chart shows the nine-year monthly results, and while the S&P and the Nasdaq both closed up on average in December 78% of the time, the Russell results were perfect, with a 4.6% average monthly gain. The seasonality phenomenon has been getting a lot of attention this week, because the second half of December is generally stronger than the first half. If the Russell 2000 Index were to close the month up, equal to its 20-year average of 3.5%, it would take the index to 1211.51, or through flag resistance and to the top end of the 2014 channel. If it were to approximate the nine-year average, it would take out both layers of resistance.
At the time of publication, Moreno had no positions in the securities mentioned.