Russell 2000: Correction, or bottom in the making?

The Russell 2000 (NYSE:IWM) limped into the close Friday, failing to take the bit and run with some of the potentially bullish chart patterns that have emerged in recent weeks off the bear market lows. Considering the chart structure and a week full of big economic news ahead of us, how the market trades this week could be critical in gauging the validity of any bottoming argument.

From a long-term perspective, there is still a decent double bottom/twin wick pattern in play on monthly Russell 2000 candlestick charts. However, we’ll need to see a rally Monday back above 686.05 to avert yet another monthly close below opening levels. If we don’t get to that price, it would mark the fifth consecutive “red” or bearish candle on monthly charts (which signifies a close below opening levels). It is extraordinarily rare for any market to generate that much consecutive bearish price action on a monthly basis, and it hasn’t happened in the Russell since 2002. What’s more, further downside erosion would also damage the quality of the bottoming patterns on monthly charts.

Looking at weekly charts, we see a little “tombstone doji” on candles; in Japanese candlestick theory, these patterns are so-called tombstones because they mark the graves of bulls who died defending their territory. Taking this pattern out of play this week becomes an important element to watch...

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