Russell 2000: Bittersweet aftertaste

Small-cap stocks continue to struggle to sustain buying interest above the 830 zone and left a mild topping pattern on weekly charts that makes price action this week critical to avert concerns that a deeper pullback is just around the corner.

Most of the long-term bulls will probably sit back and say, “What’s the big deal?” After all, the Russell 2000 actually made new record intraday and closing highs last week and the shorts remain on a very tight equity leash. Those things are true. However, the troubling element is that the market shows some signs of struggling at these levels, versus just building a higher base before soaring to new highs.

The mild topping pattern I alluded to in the opening paragraph actually plays on the new highs that were made last week. When the market makes fresh all-time highs, but closes lower for the week, that is a classic topping signal that bears close watch. Yes, I realize the percentage decline from the previous week was basically inconsequential, but that is why we want to watch chart patterns – when a market tops, it doesn’t always slap us in the face right away, sometimes it just gently taps on our shoulder.

But let’s keep things in perspective. Has the long-term trend changed from a bull market? Absolutely not! Is there a definitive reversal pattern in play that would make me instigate a profit-taking/profit protection plan on long-term longs? No, not yet. But should “hot money” short-term players be standing at attention this week to be on the lookout for confirmation or a denial of last week’s minor topping pattern? Absolutely.

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