Small cap stocks as seen via the Russell 2000 Index had a rough-and-tumble week, but the bulls came out of the tussle on top following a big recovery Wednesday through Friday. The double top formation on weekly charts from the previous week is still in place and dominates the chart picture, but some of the bearish sting of the pattern was dulled by the bounce off last week’s lows.

Friday’s action saw an opening gap on daily studies. Any time an opening gap isn’t quickly filled, the market tends to trade (often aggressively) in the direction of the window, and that played out true to form again on Friday. Looking ahead to Monday’s action, that gap remains worth watching, just to make sure something strange doesn’t take place, such as a big downside gap open to start the week that would form a top.

If small stocks can sustain the upside momentum this week and take out the double top, then it sets the stage for yet another leg up in the long-running bull market trend. However, if the Russell backs down from a hard test of the double top peak, then the key support points to watch are at our old swingline at 830 and down near this week’s low at 820. A slide through 820 without a breach of the highs would leave a troubling topping formation on charts.

As noted in last week’s column, risk for an important high is the greatest since the February top, but the overall long-term trend is still toward higher prices. It should be noted that the 20-week trend moving average held nicely on a test last week, and there is an even longer-term upward sloping trendline off multi-year lows that is well below the market.

If you are holding long-term longs at a significant profit, then I would start to formulate profit-taking strategies in case the double top is not taken out within the next couple of weeks. Short-term shorts with stops at new highs are logical, but the best bet for the last few years has been to buy dips into key support zones. The ownership structure still favors the bullish side of things, with deep-pocket commercial accounts holding a large net-long position in Russell 2000 futures.

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