Russell 2000: Freefall to key support zone, but no reversal signal yet

Small cap stocks extended the freefall last week, with the Russell 2000 (NYSE: IWM)dropping 2.8%. The market has now shed 11.8% from the record highs set in July, and remains in a vulnerable position in the shadow of the double-top high. The current downward spiral off the highs ranks as the fifth largest pullback off new highs since the bull market began back in September 2002.

From a strict historical perspective, the collapse off the highs is consistent with a bull market correction, and the market is still hugging long-term upward trendline support on weekly charts. Most market watchers consider a 20% slide off the highs to be the definitive transition from a bull market to a bear market. A 20% decline in the current move would equate to 685. There are likely some Elliott Wave disciples who would suggest that a 5-wave top is in place on the Russell Index chart, but I prefer to apply more traditional chart pattern analysis.

The market is now sitting near a logical support zone along the 760 area, a spot that formed the lows back on the abrupt February correction. Not only did the market attract buying interest there, but there are some indications that from a short-term perspective the market is oversold.

Momentum readings on daily charts are now in oversold territory, with the relative strength index (RSI) dipping to 24, which is 5 points below the March low on daily charts. However, weekly RSI readings are at 46, which still provides room for further downside exploration. Whenever the RSI is at 30 or lower, the market is considered oversold and susceptible to a corrective bounce.

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