Russell 2000: Setting the stage

Small-cap stocks had a turbulent week, with the Russell 2000 Index tumbling below key support at 830 early in the week, then storming back higher on Wednesday, only to falter on Friday. Action Thursday and Friday left a little “twin wick” double top on daily candlestick charts that will gain credibility if the market remains on the defensive early this week.

Price action on short-term charts in the Russell 2000 looks heavy, with recent comeback attempts falling short of previous highs, which is a troubling sign--in essence, the bears are beating back the bulls on rallies instead of caving in.

From a short-term perspective, watch out this week for a little downward sloping trendline drawn off the recent highs. If that line is violated, it would take quite a bit of the edge off the topping argument. Conversely, if the market sinks back below 830 and does not muster a recovery move, then we could be in for a much deeper pullback.

It’s interesting to note that the decline off the recent high has been mellow in comparison to other recent tops in the Russell 2000. The long-term bull market may be aging (over four years old now), but we still do NOT have a definitive top in place on long-term charts, and recent declines are consistent with an overbought market taking a breather.

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