Market update: Russell 2000 rises toward key Fibonacci resistance. will it break out this time?

After Wednesday's selloff, the Russell 2000 rebounded moderately on Thursday, along with the Nasdaq 100 and S&P 500, coming within striking distance from breaching an important technical ceiling at 2,050, as FOMO mentality prevailed, with traders trying to take advantage of positive sentiment in the financial markets.

The recent pivot by the Federal Reserve during its December monetary policy meeting has created a more benign environment for small-cap stocks. By prioritizing growth over inflation and hinting at multiple rate cuts in 2024, policymakers have likely steered the country away from a downturn. This unexpected move has tilted the scales in favor of a soft landing, improving prospects for corporate earnings in the coming year.

Dovish central bank policy's impact on financial conditions and markets

The ripple effects of the US central bank’s dovish posture have been very noticeable. Financial conditions, for instance, have eased dramatically, sending yields tumbling and the main US equity indices toward fresh records. The upswing in asset values, if sustained, should create a virtuous cycle for the economy, magnifying the wealth effect and boosting household spending – the main driver of GDP

Although stocks appear to be overbought, the improving economic outlook will provide continued support heading into 2024. This suggests that the recent bull run is likely to continue, perhaps after a brief period of market consolidation.

Russell 2000 technical analysis

From a technical analysis standpoint, the Russell 2000 is moving closer toward an important resistance near 2,050, established by the 50% Fibonacci retracement of the November 2021/October 2023 slump. Sellers will defend this barrier tooth and nail based on historical precedent, but in the event of a breakout, a potential rally towards 2,147, representing the 61.8% Fib retracement, could ensue.

On the flip side, if the bears regain control of the market and spark a reversal lower, the Russell 2000 may gravitate towards the psychological 1,900 level. While the small-cap index could find stability in this area before resuming its upward trajectory, a breakdown could pave the way for a more significant retreat, with the 50-week simple moving average at 1,850 acting as the next floor.

Russell 2000 weekly chart

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