Russell 2000: Still waiting for a breakout

Despite the promise of a volatile end to the week, small cap stocks remained locked in a congestion zone that has been in place for six weeks as the market tries to find its way following the abrupt slide off record highs earlier this summer.

There was a classic “head fake” move early in the week, with the Russell 2000 (NYSE: IWM) popping just above our key short-term resistance zone at 800-803 (805.68 was the high), but the move generated no follow-through upside takers, and was quickly squelched for good after the sloppy employment data Friday. Be alert for these types of “head fake” breakouts, where the market simply takes out a few stops without conviction, as they often appear when a market traps investors who are anxious to catch a decisive move.

Since the market is still mired in the muck between 805 on the upside and 750 on the downside, the key will remain to look for a breakout move. A more decisive breach of the resistance zone at 800-803 yields upside targets at 830 and possibly a retest of the highs. Meanwhile, a downside violation of 750 opens the door to 736 and beyond.

Looking at short-term intraday charts, there isn’t much in the way of support below 770, so an extension of Friday’s blues early this week could carry the Russell relatively quickly down to the 750 area. The upside gap left by the employment report remains a spot to watch for those with a quick trading horizon.

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