Russell 2000: A bottom in the works?

Last week’s price action in small-cap stocks marked a roller coaster ride to remember. In the afterglow of a dramatic 6.8% two-day recovery off 10-month lows, it’s easy to forget that the market was actually down slightly for the week. The recovery move off last week’s collapse low helped define critical support for the Russell 2000 (NYSE: IWM), while leaving the market on the doorstep of an important overhead resistance test this week.

From a short- to intermediate-term perspective, the Russell 2000 remains in a downswing off record highs set in mid-July, and it will take a decisive move back through 803, then 820 to help validate the bottoming patterns that emerged during last week’s wild ride off the lows. The long-term bull market is still intact on charts, and by definition, but obviously wounded by the abrupt downward spiral off the July peak.

Looking at the charts, we now see back-to-back bullish patterns in play on weekly candlestick charts. Remember, last week was a bullish engulfing formation (called an outside reversal on traditional charts), while this week we see a bullish “hammer” bottom on candlestick charts. What these patterns reflect are solid buying interest around the 750 zone, and an inability by the bears to press beyond that area with conviction at this stage.

The explosive volatility reflected in last week’s price action also carries some hope for a potential bottom for the move, although a few weeks of consolidation in the 820-760 zone would not be a surprise. Such a consolidation would give the market time to “digest” the overall health of things at this price level and would build a foundation for a move back toward the highs. Typically, a 14% slide in this long-running bull market move has required several months before new highs are made.

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