As the Fed came out more hawkish than expected, the market sold off on higher risks of overtightening and a worse than expected recession, bringing the Russell 2000 index into focus.

Bear Market Headwinds for Broader Market, Russell 2000

These are two of the worst possible things for the stock market and should result in a continuation of the bear market. The China reopening news during the Christmas holidays can have two implications:

· It may help with global growth and reduce the chances of a hard landing.

· Increase inflationary pressures.

Both the options though, lead to the Fed possibly being forced to go higher than their expected terminal rate, which brings us back to the original risks: overtightening and deep recession.

RUSSELL 2000 Technical Analysis

In the daily chart above, we can see how the Russell 2000 price, after falling off a cliff out of the FOMC meeting, pulled back to the nearest swing low resistance area at 1788-1798.

That looks like a strong barrier as we saw several tests without successful breaks. If the buyers manage to breach that level, the next possible upside target may be in the 1880-1900 region. If the price fails though, the October low at 1642 will be the clear target.

In the 1-hour chart above, we can see more closely the current rangebound price action with a resistance near the 1800 handle and a support at 1730. Ideally, you would want to stay out of such a market and wait for a clear breakout before deciding what to do next.

Nevertheless, one can try to play the Russell 2000 range selling at resistance and buying at support until the game stops.

Drilling down to the 15 minutes chart, we can see that there’s a resistance turned support at the moment (orange line). This level should define where the price may be headed next. In the first scenario, the price may retest the level and run to the upside testing again the resistance. In the second scenario, the price breaks down and falls to the support.