Russell 2000: Summer doldrums, or market indecision?

Wait a second ... did small caps really just navigate through jobs report week on an “inside session” amid fairly tight ranges? If you were watching the stock market trade all day every day this week it seemed like intraday volatility was extreme, like the market was stuck on an elevator with little kids pushing all the buttons constantly. Turns out, the elevator wasn’t really going anywhere.

For the week, the Russell 2000 (NYSE:IWM) gained 0.8% and action was confined within the previous week’s ranges, which seems quite odd for a week that was littered with economic data minefields and which culminated in a head-scratcher of a jobs report Friday. Maybe that was the problem; if you’re a bull, you could hang your hat on the better-than-expected decline in non-farm payrolls. If you’re a bear, it was easy to point to a jump in unemployment to the highest rate in more than four years as recession fodder. In the end, nobody took charge of the debate and now we’re looking at an inside week for small caps.

An inside session typically reflects market indecision and a potential shift in trading direction. Of course, it is peak summer vacation season and maybe we’re just drafting in place amid the ole summer doldrums phase. From a price action/charting standpoint, it doesn’t really matter if all the money managers are summering in the Hamptons and the rest of us are slogging the kids off to Disneyworld, the patterns still mean something.

In this case, the inside session week cautions that the upside push off the July lows has lost conviction. The market already stalled two weeks ago right on our resistance point near 726 and was unable to muster a convincing run at that spot this week. On daily charts, there is a little consolidation rectangle covering the last nine trading sessions, and a breakout in either direction of that rectangle carries a target move of 32 handles and is worth watching this week.

Looking at weekly charts, the Russell has closed above opening levels for four consecutive weeks. The market hasn’t generated five consecutive green candles in more than two years, so either we’re on the verge of a really nice upside breakout, or this move is running on fumes. On monthly charts, the market does have a nice bottoming pattern, and as long as prices stay above 690, it will keep the bottoming argument in a healthy position.

Looking ahead to this week’s action, it still looks like the key points to watch are at 726 on the upside, and 690 on the downside (if that sounds like déjà vu all over again, well we did just have an inside week). The overall chart pattern is still consistent with a market that has generated a nice bounce off logical long-term support and is working higher. The problem is that momentum and short-term patterns are not validating an immediate upside extension of the move. If we can breakout to the upside this week, then all is well, and a march toward 750 is logical. However, a slip through 690 truly opens the door to yet another retest of the lows.

The table below contains support and resistance points for the Russell 2000 to keep in mind heading into next week’s trading activity. For long-term traders, some of these key levels may remain in place for weeks ... even months at a time. Those with a short-term horizon will lean toward levels that are more immediately in play. As time passes, we will build upon this table with levels that come into focus as important testing zones for trend analysis, and to act as road mark indicators for key reversal patterns.

From a trading perspective, I always keep a printout handy each day of my key support and resistance points for any stock or market I’m trading. It helps remind me of key areas to watch for signs of trend exhaustion, and also for potential entry/exit points for trades. Keep in mind that when the market is near record highs, it is much easier to find valid support than resistance points.

TECHNICAL ANALYSIS SUPPORT/RESISTANCE POINTS FOR RUSSELL 2000

-  890.16   upward channel resistance on monthly charts off five-year run;
            also fits with potential upside breakout of congestion zone
-  860.00   projected “figure” resistance off 15-handle testing zones on the 2006 rally
-  856.48   record intraday high set July 13
-  855.77   July 13 close; record high daily and weekly close
-  852.06   Oct. 11 high; bearish reversal peak on daily charts
-  830.01   previous high from the February 2007 peak; key swing line of note
-  815.00   key swing line
-  801.00   congestion resistance zone from November to December 2006
-  775.03   61.8% Fibonacci retracement of the August 2007 peak-March 2008 collapse
-  762.89   recent move high set June 5, 2008
-  760.06   March correction low; key approximate double bottom formation support;
            Near 50% Fibonacci of July 2006 to 2007 bull run; violated in November 2007;
            Key swingline to watch
-  743.49   previous August 2007 collapse low; short-term support violated, now resistance;
            Also near chart gap left by Jan. 2008 employment report news 
-  726.19   July 2008 bounce peak; short-term resistance to watch
-  720.50   recent trading range swing point
-  716.14   August 1 close
-  713.00   20-week moving average; nice trend support for bull run; smashed on
            July/August 2007 collapse
-  700.00   “figure” swing line; no monthly close below here since December 2005 until February 2008
-  693.00   20-day moving average
-  685.00   20% decline off 2007 record highs; breached Jan. 2008 and July 2008
-  680.94   mild reversal low on daily charts Jan. 28; near 50% of the March 2008      bounce
-  668.58   July 2006 low; important bottom for summer correction
-  660.00   short-term downside target on wedge breakout; support zone
-  650.00   previous bear market move low set Jan. 22, 2008, critical support zone
-  647.37   July 15 2008 low; approximate triple bottom with January 2008; March 2008
-  643.35   recent move low set March 10, 2008
-  614.76   October 2005 bottom; next major chart related downside point
-  591.00   50% Fibonacci retracement of the 2002 to 2007 bull market run

In addition to the print out of support and resistance points to watch, I also like to keep in mind where sudden volatility can spring into the trading mix from the typical release of economic data and Federal Reserve activity.

The economic calendar is fairly quiet this week and there are no Federal Reserve speakers making the rounds, even after the FOMC blackout. This is the first time in many months in which I didn’t rank the FOMC statement as a “5” on the risk event scale, but it’s a given among market watchers that Fed will not raise (or cut) rates, so only an odd change in sentiment from the statement would be a big surprise to the market. After last week’s big move on the weekly claims report, that item could actually be the one to watch on Thursday morning.

The table below highlights calendar event risk for next week, with the emphasis on various economic reports. Our table below has a special “Risk Factor” designation, which is simply my assignment of risk to that event, ranging from 0 to 5, with 5 marking the highest risk for volatile market swings.

CALENDAR EVENT RISK ASSESSMENT FOR THIS WEEK

RISK FACTOR     REPORT/ITEM (all times Eastern)

                  Personal Income (Mon., 8:30 a.m.)
                  Factory Orders (Mon., 10:00 a.m.)
3                ISM Non-Manufacturing Survey (Tues., 10:00 a.m.)
4                FOMC Meeting (Tues., 2:15 p.m.)
3                Weekly Claims (Thurs., 8:30 a.m.)
0                Consumer Credit (Thurs., 3:00 p.m.)
1                Productivity (Fri., 8:30 a.m.)
1                Wholesale Inventories (Fri., 10:00 a.m.)


There is a congestion zone on daily charts from recent action. A breakout in either direction carries a 32-handle target move.


Intraday volatility might have seemed lofty this week, but the overall action was relatively tame -- especially for a jobs week. As you can see on the chart, the Russell actually had an "inside" zone this week -- trapped within the previous week's range.

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