Russell 2000: Double top dominates immediate picture

Kevin Pendley | Aug 22, 2008 5:11pm EDT | Comment

Rating: Unrated [rate it]

Small-cap stocks retreated this week off the bearish reversal top on daily charts from the fresh move high August 15. As we noted in last week’s column, when a market makes new highs, but closes lower, it signals a key failure and falls under the description of a bearish reversal. What’s more, that pullback left a disconcerting double top in sight on weekly charts, as the August 15 peak corresponds fairly tightly with the big top formed back on the June rally. Even though the market had a “feel good” finish to this week’s trading via Friday’s 1.7% bounce, the Russell 2000 (NYSE:IWM) still faltered 2% for the week and did little to negate the budding double top formation.

One positive element in play was that the market repeatedly fought back selling interest in the 726 zone, which was a support point on short-term studies. If we see a more decisive breach of 726 in the coming week, then that will put small-caps on tenuous footing.

This week’s pullback halted an impressive string of bullish candles on weekly studies; the Russell had closed above opening levels for a dazzling run of six consecutive weeks, a show of strength that is unheard of in even the most powerful bull market runs. Still, in order to ease the concerns tied to a potential double top, the market needs to quickly climb higher, or embark on a sideways consolidation that over time diminishes the double top formation.

If the Russell can push back above 750 this coming week – especially on a closing basis – then it would dent the power of the topping argument. Any move back above 760 would clearly endanger the bearish argument as well. While the immediate pattern studies aren’t as dynamic as last Friday’s setup, the odds right now tilt slightly toward either a bearish resolution or a sideways consolidation more than an upside breakout. It wouldn’t be a surprise to see a range eerily similar to the one that took place during this week’s trading (725 on the downside to 750 on the upside).

The table below contains support and resistance points for the Russell 2000 to keep in mind heading into the coming week’s trading. 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.

TECHNICAL ANALYSIS SUPPORT/RESISTANCE POINTS FOR RUSSELL 2000

- 890.16   upward channel resistance on monthly charts off 5-year run;
            also fits with potential upside breakout of congestion zone
- 860.00   projected “figure” resistance off 15-handle testing zones on the ’06 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-December 2006
- 775.03   61.8% Fibonacci retracement of the Aug. 2007 peak-Mar. 2008 collapse
- 764.38   new move high set August 15, 2008; approximate double top with June ‘08
- 762.89   previous move high set June 5, 2008
- 760.06   March correction low; key approximate double bottom formation support;
            Near 50% Fibonacci of July ’06-’07 bull run; violated in November ’07;
            Key swingline to watch
- 743.49   previous Aug. ‘07 collapse low; short-term support violated, now resistance;
            Also near chart gap left by Jan. 2008 employment report news
> 737.60   August 22 close
- 728.85   20-day moving average
- 726.19   previous double top in June/July 2008; now support
- 720.55   20-week moving average; nice trend support for bull run; smashed on
            July/August 2007 collapse
- 720.50   recent trading range swing point
- 700.00   “figure” swing line; no monthly close below here since Dec ’05 until Feb ‘08
- 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 ’08 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 Jan ’08; Mar ‘08
- 643.28   recent move low set Mar. 10, 2008
- 614.76   October 2005 bottom; next major chart related downside point
- 591.00   50% Fibonacci retracement of the 2002-2007 bull market run

In addition to the printout 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 this week is active, but lacks a truly head-turning number that would force the market to wait with anticipation. That said, consumer confidence Tuesday and GDP Thursday could spark tremendous volatility in equity and foreign exchange trading.

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 THE WEEK OF AUG. 25

RISK FACTOR REPORT/ITEM (all times Eastern) Consensus

    3           Existing Home Sales (Mon., 10:00 a.m.)               +0.9%
    1           Case Shiller Home Price Index (Tues., 9:00 a.m.)    -16.2%
    4           Consumer Confidence (Tues., 10:00 a.m.)              53.0
    2           New Home Sales (Tues., 10:00 a.m.)                   -1.2%
    3           FOMC Minutes (Tues., 2:00 p.m.)
    2           Durable Goods (Wed., 8:30 a.m.)                        +0.1%
    2           Fed’s Lockhart on inflation (Wed., 8:30 a.m.)
    4           GDP (Thurs., 8:30 a.m.)                                     +2.7%
    4           Weekly Claims (Thurs., 8:30 a.m.)                     425,000
    3           Personal Income (Fri., 8:30 a.m.)                         0.0
    2           Chicago Purchasing Manager’s Survey (9:45 a.m.)   50.0
    2           Michigan Sentiment (10:00 a.m.)                          62.0