Three-year lows amid breathtaking volatility; 650 now upside key

    Remember when you were a youngster and you’d grab the newspaper, scroll through the stock quotes and get all giddy if the stock you owned moved more than 1/4 the previous day? (Yeah, that’s $0.25 a share to all of you who weren’t trading stocks before 1985.) Well, recent action in small-cap stocks truly makes those days seem like a very long time ago. In just two weeks, the Russell 2000 (NYSE:IWM) has gone from the highest weekly close of 2008 to the lowest weekly close since May 2005. That’s a stunning 18% move from high to low and this week alone saw small caps collapse 12%. A dramatic surge in volatility often accompanies a major market bottom, but standing in the way of this bearish freight train is hazardous to your wealth.

    The Russell tumbled back into official bear market territory this week and barely waved goodbye on the way down. If you’re keeping track, 685 marks the “official” technical designation of a 20% decline off record highs. Right now, the market is actually sitting near 620, only a few handles above the major lows from October 2005. At that point in time, small-caps were simply correcting lower in the midst of an amazing 5-year-plus bull market stampede. Right now, small-caps are careening lower as America bails out of equities while bracing for a recession. Heck, who are we fooling anyhow waiting for some government number-crunchers to declare that an “official” recession has taken place? Manufacturing numbers are already consistent with a recession. Weekly unemployment claims jumped to the highest point this week since the 9/11 attacks seven years ago. Non-farm payrolls on Friday lost more jobs in one month than we’ve seen in some five years – and economists predict the next two months will be worse. The recession is already here for the common man. Back in March, I wrote a column that examined stock market price action in the four major recessionary periods since 1970. To recap, three of those four recessions saw declines off the pre-recession peak on the order of 50%. The Russell is now down 27% from the record high set in the summer of 2007. A 50% decline would be approaching 430, which seems too scary to even consider right now.

    With the market down at three-year lows, it will come as no surprise to you that the chart structure is bearish. For months, the most dynamic patterns playing out for the Russell have been on the bearish side of the ledger, and the last two weeks bore the fruit of those formations. Looking ahead to next week’s action, we are fast approaching important support at 614, which marked the lows back in October 2005. If we get through that point, then there is a little support close by at 606, then very little until we get closer to 577.

    Momentum readings on most time frame studies are oversold, but it should be noted that the market can often run right through “textbook” readings in the midst of a panic move, so it’s best not to rely on readings alone when looking for a bottom, or at least a consolidation area. This is a bear market. The best patterns have been bearish for a long time. Until we see a decisive foundation built, or a couple of reliable bullish reversals, this will be a sell-rallies market.

    From a shorter-term trading standpoint, it was fascinating to see where the rally stalled this past Friday before the afternoon crash. The market went right up to logical resistance just shy of 660 and hit a ceiling. That zone between 650 and 660 now stands as important resistance. Persistent price action below 650 will suggest that the market is establishing a new lower range, and would open the door to yet further deep downside targets.

    That said, I think the most likely course of action next week would be for the Russell to find buyers above the 600 level, with an upside range toward 660. However, if the market smashes through 600, then a run down to 575 or even 550 is very likely.

    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 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 
-  726.19   previous double top in June/July 2008
-  720.50   recent trading range swing point
-  711.30   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 Dec ’05 until Feb ‘08
-  697.73   20-day moving average
-  685.00   20% decline off 2007 record highs; breached Jan. 2008, July 2008, Sept. ‘08
-  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; now resistance
-  660.00   short-term downside target on wedge breakout; now swing line
-  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; snapped
            October 2008
-  643.28   previous move low set Mar. 10, 2008
>  619.40   October 3 close; lowest weekly close since May 2005
-  614.76   October 2005 bottom; next major chart related downside point
-  606.42   April 2004 highs, now long-term support
-  591.00   50% Fibonacci retracement of the 2002-2007 bull market run
-  577.00   consolidation zone when marketing was bottoming in spring 2005
-  570.06   absolute low on spring 2005 bottom

    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 next week is thin. The FOMC minutes Tuesday afternoon, and a speech the same day by Fed Chair Bernanke look like the potential wildcard events. Also, Thursday’s weekly claims report now takes on greater significance following the somber monthly employment release from this week.

    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)                Consensus

2           Fed’s Evans “econ outlook/manufacturing”(Mon., noon)
1           Fed’s Fisher “Fed & regional econ” (Mon., 1:30 p.m.)
2           Fed’s Stern “financial shock” (Tues., 11:00 a.m.)
5           Fed Chair Bernanke “econ outlook” (Tues., 1:15 p.m.)
3           FOMC minutes (Tues., 2:00 p.m.)
0           Consumer Credit (Tues., 3:00 p.m.)                           $5.8 bln
0           Fed’s Plosser “central banking” (Wed., 7:45 a.m.)
3           Weekly Claims (Thurs., 8:30 a.m.)                            475,000
1           Wholesale Trade (Thurs., 10:00 a.m.)                          0.4%
0           Fed’s Stern “financial shock” (Thurs., 1:30 p.m.)
0           Fed’s Rosengren speech TBA (Thurs., 6:00 p.m.)
2           International Trade (Fri., 8:30 a.m.)                       -$59.0 bln
0           Import Prices (Fri., 8:30 a.m.)                              -2.5%
0           Treasury Budget (Fri., 2:00 p.m.)                         

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