Technical Analysis: A risky minefield

Small cap stocks as seen through the Russell 2000 Index continue to hover in the 830 zone, trying to grind down seller resistance at that level in a methodical fashion. Make no mistake, an important battle line has been drawn here between the bulls and the bears. Back in February, this is roughly the same area where the sellers turned back the tide, so another showdown in this area makes sense.

Back in February, we saw the formation of a commanding chart pattern (double top on weekly charts) that provided an important road sign that the market just was not ready to tackle 830 with conviction. So far on this latest battle, we have NOT seen a decisive chart topping pattern, but we have to remain cautious.

Going into the test this time around, the market was facing an uncertain seasonal (approximate 5% declines the previous two Aprils despite a bull market trend), and overbought conditions on momentum readings. The fact that the market was able to punch through the February highs to notch new record highs has been a positive development.

In addition, the ability to peck away at seller resolve in the 830 zone has been a solid development. If the market can continue to hold support, then a sudden burst higher to another leg up would be a logical conclusion, and would fit the underlying long-term bull market trend. That said, this is a risky minefield for the market, and we are heading into a scary week, with an economic calendar that threatens sudden volatile twists and turns nearly every day leading into the “Big Event” – Friday’s employment report. If the market has exhausted buyer enthusiasm and the sellers can turn back the tide once again, this would be a logical week for things to turn. If the Russell 2000 can burst through to new record highs after the employment report, it could put intense equity heat on the shorts who took a logical stab near the previous highs, but are suddenly facing equity losses.

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