Russell 2000 path of least resistance: Down

Since last October, the dynamic chart formations in play on small-cap stocks have been bearish in structure; so far nothing has changed that perspective. This past week the Russell 2000 (NYSE: IWM) tumbled to the lowest close Friday on monthly charts since December 2005. That also marked the last time we saw the Russell generate a monthly close below the key figure support line of 700.

In addition, the market has now closed below opening levels on monthly charts four consecutive frames, something that hasn’t happened since 2002, and has only happened twice in the last 15 years.

So, what does it mean when we see these rare bearish formations and the market slump hits these kinds of crescendos? First off, it devours long equity. If you’ve had a winning position in small caps and now it’s a loser, it becomes extremely difficult to hold on to that losing position, much less devote fresh funds to buying more stock. One of the attributes of chart study is that it points out the power of equity – until we see an impressive reversal pattern, we must expect that the path of least resistance will be toward lower prices.

The Russell 2000 has basically been trending sideways since the surprise rate-cut bottom in January, stalling perfectly in tune with our resistance zone at 734-743. Until we see that resistance zone snapped, then the risk remains to retest the January low down at 650. That risk to retest the lows gained stature last week when the market tumbled back below the figure line we’ve been watching at 700. There is minimal support of note between 680-675 and that 650 line, so if the market can’t find good news this coming week, then it might not take much to suddenly see things back around 650.

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