Russell 2000: Assessing the Zigzag Correction's Support and Path to New Highs

The Russell 2000's recent rally is a classic impulse wave, and the market is now in the corrective phase that follows. The bullish structure is confirmed: Russell 2000 futures have broken to a new all-time high, validating the broader uptrend that began at the April 2025 low. This move completed a clear impulse wave, with the final leg carrying the index to a peak of . The correction that follows is now in progress, retracing the cycle from the November 21 low.

This corrective wave is forming a specific pattern: a zigzag. The structure is defined by three sub-waves: a sharp decline (wave ((a))) from the peak, a partial recovery (wave ((b))), and a final leg down (wave ((c))). The critical question is how far wave ((c)) will extend. According to the analysis, . . It represents the critical support level that will determine if the correction ends and the primary uptrend resumes.

. As long as this level holds, it provides a floor for buyers to re-enter. The expectation is that buyers will appear in the next few swings, allowing wave 2 to finish and setting the stage for a potential resumption of the uptrend. The path of least resistance is higher, but the market must first navigate this zigzag correction and test the 2397–2471 zone. Failure to hold that support could signal a deeper pullback, but for now, the bullish impulse wave remains intact.

The Macro Engine: Policy Tailwinds and Cyclical Sensitivity

The primary drivers for a small-cap breakout are now aligning. The recent outperformance is not a fluke but a direct result of a dovish Fed policy shift. , a streak that ties for the longest in two years. This momentum is fueled by the third consecutive Federal Reserve rate cut and the clear expectation of more easing. Strategists see this as a key tailwind, with Bank of America's forecasting a "long-awaited profits rebound" for small caps in 2026.

Structurally, small caps are favored in the year following Fed rate cuts. This pattern is currently in motion because lower rates directly reduce the funding costs for these companies. Smaller firms typically carry a higher proportion of floating-rate debt than their larger peers, making them more sensitive to interest rate changes. When rates fall, their debt servicing burden eases, boosting net income and cash flow. This dynamic is a classic cyclical advantage that small caps are now unlocking.

The incoming administration's pro-growth policies add a powerful domestic tailwind. Optimism around potential tax cuts, deregulation, and targeted fiscal stimulus is seen as a key catalyst for small-cap earnings growth. These policies are expected to support economic expansion, which benefits the more economically sensitive small-cap sector. As one strategist noted, this could drive a "broadening of U.S. equity market returns," a scenario historically favorable for small caps.

The bottom line is that small caps are cyclical by design. Their performance is tightly linked to the economic cycle and monetary policy. The current setup-a dovish Fed, a potential fiscal boost, and a valuation discount-creates a favorable engine for a breakout. However, the path is not guaranteed. The sector remains sensitive to manufacturing data and broader economic health, as noted by strategists who caution that the Russell 2000 is currently trading as if economic conditions are better than they are. For now, the macro engine is turning over, but its full power will depend on whether the economic recovery materializes.