Russell 2000: Time for a breather

The Russell 2000 (NYSE: IWM) opened below our key swing line last week at 800 and retreated from there, sinking to the lowest close on a weekly basis since late July. That decline wipes out long equity from buyers during the summer bounce and keeps equity heat on soft longs.

The chart structure right now retains a top-heavy bias, spiraling lower in the shadow of that impressive long-legged doji formation from five weeks ago. It should be noted that some short-term downside targets have either been met, or are in sight (760 was the target on the daily head-and-shoulders topping pattern).

With some profits in hand from short-term trading interests, the market could generate a recovery bounce this week, or at least a sideways consolidation pattern. In fact, if the Russell does not manage to hold near the 760 line this week on selling forays, then we could see a surprisingly rapid descent to test the summer spike low down at 736.

Looking at daily charts, we see that stochastics are now at the lowest point since July, which indicates that the market is approaching short-term oversold levels. (Stochastics are a momentum oscillator used to track potential overdone situations, with 75 and 25 the common numbers to watch for overbought/oversold conditions). We still don’t see a decisive upward cross in stochastics, and it is possible that the market could work off these oversold conditions via time instead of price. There is a minor twin wick bottom on daily candlestick charts, and this pattern requires immediate upside movement and no hard test early this week to support any bottoming theories.

The most likely action this week would be a consolidation “breather” with the market pinging back and forth between 800 and 760. If we see a decisive push through either side of that range, then it could trigger a more impressive run. Above 800, look for resistance at 815 and 830, while support on a breach of 760 is at 748 and 736.

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