Russell 2000 Technical Analysis – Inflation data doesn’t cooperate

Fundamental
Overview

The US CPI report on Wednesday came in line
with expectations and sealed the 25 bps cut next week. That helped the Russell
2000 as the hedges into a potentially hot CPI got unwound. The gains though
were short lived. The US
PPI yesterday surprised to the upside and weighed on the sentiment as
inflation fears keep the bullish momentum at bay.

Overall, the market’s
pricing remains largely unchanged around three rate cuts by the end of 2025 and
we will likely need stronger evidence of inflation re-accelerating to price out
the remaining rate cuts.

Next Wednesday, we have the
FOMC decision, and although the central bank will likely match the market’s
pricing, we could have an overall hawkish event. The market participants might
want to err on the defensive side which could limit the upside in the market.

In the bigger picture,
Trump’s policies should be a positive driver for growth in 2025 and with the
Fed remaining in an easing cycle, growth should remain positive and might even
accelerate as seen already by the Atlanta Fed GDPNow indicator.

The risk in 2025 will be
inflation and the Fed’s reaction function. Right now, the Fed’s reaction
function is that a strong economy would warrant a slower pace in the easing
cycle and not a tightening. That should still be supportive for the stock
market.

If the Fed’s reaction
function were to change to a potential tightening, then that will likely
trigger a big correction in the stock market on expected economic slowdown. For
now, we remain in a “buy the dip” environment.

Russell 2000
Technical Analysis – Daily Timeframe

On the daily chart, we can
see that the Russell 2000 continues to pull back as we head into the FOMC
decision next Wednesday. From a risk management perspective, the buyers will have
a better risk to reward setup around the 2290 support. The sellers, on the other hand, will want to
see the price breaking below the support to extend the correction into the
major trendline around the 2200 level.

Russell 2000 Technical
Analysis – 4 hour Timeframe

On the 4 hour chart, we can
see that the recent price action formed what could turn out to be a bull flag. The buyers will want to see the price
breaking above the top trendline
to pile in for a rally into new all-time highs. The sellers, on the other hand,
will likely lean on the top trendline to position for a drop into the 2290
support.

Russell 2000 Technical
Analysis – 1 hour Timeframe

On the 1 hour chart, we can
see that we have a minor downward trendline defining the current bearish
momentum on this timeframe. The buyers will want to see the price breaking
higher to target the top trendline of the bull flag.

The sellers, on the other hand,
will likely lean on the trendline to target a break below the bottom trendline
of the bull flag and increase the bearish momentum into the 2290 support. The
red lines define the average daily range for today.