First, let's take a short-term look at the S&P 500. Above is a daily chart of the SPX going back to April. The fact that it has continued to make higher highs and higher lows is undeniable - a clear sign of a bull market. However, I'm starting to get whiffs of significant weakness. Let me explain...
First, its RSI peaked back in July, coincidentally the same time that the RUT peaked. And if you look at the MACD, that peaked even a month earlier in June. So when the S&P was making new highs in late July and September, its internal momentum indicators were not confirming. That's red flag #1.
Red flag #2 is that oh-so-important volume has not confirmed recent highs either. In fact, the highs from late July and early September were both on paltry volume - yet another non-confirmation. And if you look at the volume during the entire 5% August rally, you'll that volume was next to nothing.
Finally, red flag #3 occurred on September 19 when the index put in a fresh all-time high and then reversed to close in the lower half of its trading range ON HUGE VOLUME. Yes, I know it was options expiration which no doubt contributed to the volume, but still, this is easily the single highest volume day in over 6 months (which includes several OPEX days). The candlestick pattern formed on September 19 is known as a Spinning Top. According to Investopedia, "If a spinning top formation is found after a prolonged uptrend, it suggests that the bulls are losing interest in the stock and that a reversal may be in the cards."
Getting back to the Russell 2000 (RUT) and the title of this post, I want to share the following chart from the 2007 timeframe. Here we have the S&P 500 (top panel) compared to the RUT just prior to the 2008-2009 financial meltdown.
If this analog holds, then we might be for a rough ride.