Close at highest weekly level since last December

Kevin Pendley | Sep 19, 2008 10:25pm EDT | Comment

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Small-cap stocks survived one of the most dramatic weeks in equity history; wait, they not only survived a stressful week, but in the end, the bulls ran roughshod on any Johnny-come-lately bears as the Russell 2000 (NYSE:IWM) stormed to the highest weekly close of 2008.

Yep. You read that right. After suffering the two largest one-day declines of the year while the Dow was blitzed by the largest swoon since the 9/11 attacks seven long years ago, small-cap stocks rebounded late in the week to close at the highest weekly level since last December.

Actually, “rebounded” is probably too tame to describe the stunning rally that took place Thursday and Friday in the stock market. We can debate until we’re blue in the face whether or not the government has any business rescuing financial firms from the brink, and whether or not they should restrict short selling practices, but the fact is that on a weekly basis NEARLY EVERY SINGLE SHORT IS HOLDING A LOSING TRADE RIGHT NOW.

In addition to the obvious bullish equity position of the market at this moment, the pattern picture is pretty impressive as well. For starters, weekly charts sport a bullish outside reversal pattern off lows for the move. The last time that took place just happened to be the summer bottom that kicked off the run to the August highs.

In addition, the market is now back on a test of those summer highs, which used to be a formidable double top in the 760-763 zone. As long-time readers of this column know, I respect double top formations, but triple tops have a way of getting kicked down. Think of it this way...when the market retreats off a double top, the bears have won the argument convincingly and told us that the market just isn’t ready for that level. However, when the market finds the strength to do battle with a previous double top, then some of the selling reserve has been used up. A champion prize fighter might survive two strong blows to the chin in the first round of a fight, and then in the sixth round, but after 3 rounds of body blows, the chin often gets soft after the 10th round.

Going into last week’s action, I said that weakness Monday through 692 could trigger a big downside press and that an upside rally back above 720 could spark a run to 750. Who would’ve known that BOTH scenarios would play out? In addition to the aforementioned 763 line, I will be watching closely to see how the market reacts to any stab at 775. That point represents a 61.8% retracement of the entire bear market collapse. It is entirely possible that the market could run the gamut of being in a bear market to moving into a bull market push within a one-week time frame, which really is astounding. (The Russell slipped through 685 last week, which represents the official 20% bear market indicator). A sustained drive through 775 would suggest that the bear market is over, and that a run toward all-time highs is now the goal.

However, if the market starts to get uneasy about the government’s bail-out plan for financial companies, then a slide back below 720.50 would once again endanger all the positive action from the recovery move. Clearly, any slide back through 692 would suggest that the amazing rally was more smoke and mirrors than substance.

It should be noted that volatility levels shot through the roof. As noted previously in this report, we have repeatedly seen volatility go wild on key market bottoms. If you were brave enough to notice that trend ahead of Thursday’s midday recovery move and you bought stocks, then you are probably reading this column aboard your new yacht off some Caribbean island paradise. The brutality of last week’s manic trade made it very difficult to be a player on any side of the market, however.

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.

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
> 753.74   September 19 close
- 743.49   previous Aug. ‘07 collapse low; short-term support violated, now resistance;
            Also near chart gap left by Jan. 2008 employment report news
- 726.19   previous double top in June/July 2008
- 723.43   20-day moving average
- 722.42   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
- 692.08   61.8% Fibonacci retracement of the July-August rally
- 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.

Event risk this week isn’t about the economic numbers. It’s all about Federal Reserve Chairman Ben Bernanke and his three big appearances Tuesday-Thursday, which should provide additional illumination on the emergency actions taken to bail out American’s financial crisis. Sure, we’ll get other numbers like GDP and home sales, but they’ll take a big-time back seat to the politics of crisis management.

The table below highlights calendar event risk for the 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

RISK FACTOR REPORT/ITEM (all times Eastern) Consensus

3      Fed’s Fisher; economy, fin’l stress (Mon., 11:30 a.m.)
5      Fed’s Bernanke on financial markets (Tues., 10:00 a.m.)
5      Fed’s Bernanke on the econ outlook (Wed., 10:00 a.m.)
2      Existing Home Sales (Wed., 10:00 a.m.)                          4.94 mln
3      Durable Goods (Thurs., 8:30 a.m.)                                -1.5%
3      Weekly Claims (Thurs., 8:30 a.m.)                                450,000
3      New Home Sales (Thurs., 10:00 a.m.)                            510,000
2      Fed’s Evans credit turmoil conf. (Thurs., 10:40 a.m.)
4      Fed’s Bernanke on GSE actions (Thurs., noon)
1      Fed’s Warsh credit turmoil conf. (Thurs., 1:00 p.m.)
0      Fed’s Fisher speech TBA (Thurs., 6:15 p.m.)
1      Fed’s Plosser credit turmoil conf. (Thurs., 7:45 p.m.)
3      GDP Q2 final (Fri., 8:30 a.m.)                                        3.3%
2      Michigan sentiment (Fri., 10:00 a.m.)                            71.0%
2      Fed’s Bullard at econ outlook conf. (Fri., 1:00 p.m.)