Small cap stocks soared to record highs last week, but the climb was short-lived and saw a fairly violent descent off that peak to a sluggish weekly close. An inside session recovery move Friday was of little consequence in the scheme of things. From a long-term perspective, the bull market in small caps is alive and well, but the sharp reversal last week formed some mild topping signals to watch in the short run.

On Wednesday, May 23, the Russell 2000 Index jumped to a record intraday high after setting a record closing high the previous session. The first thing these two records accomplished was to ease some of the jitters from recent uneven price action. No matter how one slices things, record highs take an equity bite out of the short sellers and help to sustain upward price direction.

The current bull market charge in small cap stocks has been in place since October 2002, which makes us more concerned about the move being “tired” or susceptible to a top or hard corrective turn. If last week’s top marked a noteworthy high, then a pullback to Fibonacci retracement points off the March-May rally makes sense. For those keeping track, those levels for the Russell 2000 are 813/803/792. From a long-term standpoint, the critical support is down around 760. From a trend watching stance, keep an eye on the various 20-period moving averages (daily, weekly and monthly), as these lines have been decent trend indicators.

This week delivers a holiday-shortened risk-filled extravaganza, with the jobs report on Friday looming throughout the action. I usually like to see how the market closes out on an employment week as a sign of health or caution. If the Russell 2000 closes out on a lackluster note after jobs, then it would add some validation to the short-term topping concern. Conversely, if the index is back above our long-running battle line at 830 after the employment report, then the pressure remains on the shorts to come up with a new bearish argument.

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